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Every retirement plan has a person or an administrative committee specifically named as a fiduciary in the document that established the plan. If you are the plan sponsor, you are the fiduciary. Others who may be counted as fiduciaries may be anyone who has discretionary control over the administration of the plan or the investments offered in the plan. Fiduciary status is determined as much by function as by title.

While the responsibilities are tremendously important, they aren't necessarily difficult. Being a fiduciary is a matter of complying with the requirement outlined in ERISA (Employee Retirement Income Security Act of 1974) that governs the operation and management of retirement plans and seeks to protect the interests of plan participants.

ERISA sets out four basic tenants or duties of every fiduciary. Let's look at these together.

1. Demonstrate loyalty to the plan. In short, it is the responsibility of the plan sponsor to act solely in the interests of the plan, its participants, and beneficiaries. For instance, a plan sponsor can't use plan assets for his/her own advantage or borrow from the plan. He/she can't receive any personal benefit from any third party that is associated with the plan.

2. Proceed with prudence. Commonly referred to as the "prudent man rule," ERISA asks that plan sponsors "act with the care, skill, prudence, and diligence" that a prudent individual familiar with retirement plan issues would use under similar circumstances. A simple action that all plan sponsors should take is maintain a due diligence file that documents all decisions you make with respect to the plan. A written record should also address the process used to reach your decision.

3. Diversify investment options. As basic as it sounds, diversification of investment choices inside a retirement plan is as important as diversification in our own personal investment portfolios. Plan sponsors can increase the diversification in their plan by offering enough investment choices with materially different risk and return characteristics and different investment risk objectives, funds that focus on investments both inside and outside the United States, and bond funds with different rates of maturity and credit quality. Growing in popularity is the use of lifestyle and lifecycle funds. Respectively, these are (1) fully-diversified asset allocation funds designed to represent a participant's risk tolerance and (2) fully-diversified asset allocation funds targeting a participant's expected retirement date. A common feature of these options is automatic rebalancing.

4. Act in accordance with plan terms. A solid plan document is the step-by-step guide that outlines the course of action for plan sponsors. It spells out the rights and obligations of all parties involved in the plan, as well as the rules for administering the plan. This document may be prepared by a third party administrator, a 401(k) vendor, or by an ERISA attorney.

Breaches of responsibility made by well-meaning plan sponsors may still result in significant penalties. Ignorance is no excuse. Commonly made mistakes include: a) failing to offer a diverse mix of investment choices, b) failing to adequately monitor the plan's investment options and if necessary, replacing options that aren't producing appropriate returns over time, c) untimely remittance to the plan of employee contributions, and d) allowing loans or distributions not specifically authorized by the plan document. Co-fiduciaries may be held responsible for the actions of one another as well.

Penalties for non-compliance may include: a) restoring/reimbursing losses incurred by the plan b) monetary penalties and payment of attorneys' fees or possible excise taxes, c) civil actions and penalties, and d) criminal penalties resulting in fines or imprisonment.

Fortunately, there are some practical steps that you can take to help protect yourself from liability and demonstrate ERISA prudence.

• Create a 404(c) compliance checklist and appoint a plan fiduciary as the party responsible.
• Create an investment policy statement for your plan.
• Monitor investments in the plan at least once every year.
• Review plan operations at least once every year.
• Document your decision making process and actions (maintain an updated fiduciary file).
• Communicate regularly with your plan's service providers and legal advisers.

Recent events and highly publicized court cases make it more important than ever for plan sponsors to understand their responsibilities and take appropriate action. Now is a great time to offer education classes to your plan participants. Inviting your plan's service provider or a third party to speak to your plan participants not only helps them to make better informed decisions, it creates morale and shows you care. If you're in doubt or need help, seek assistance or request a plan review today.


Chad Carlson is a financial advisor with Delta Trust Investments, Inc. Chad may be reached at ccarlson@delta-trust.com.

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