401(k) Fiduciary Liability: Plan Fiduciary FAQs

Understanding the ins and outs of fiduciary liability is difficult at best, especially if you work in a profession that has nothing to do with retirement savings.  Below, we’ve gathered a list of fiduciary liability frequently asked questions to aid you in understanding the basic responsibilities and risks associated with the role of fiduciary.

Who is a Fiduciary?

According to Investopedia, a fiduciary is defined as “a person who acts on behalf of another person, or persons to manage assets. Essentially, a fiduciary is a person or organization that owes to another the duties of good faith and trust.” Many of the actions involved in operating an employee 401(k) benefit plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of the person’s discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not a person’s title

A plan’s fiduciaries will ordinarily include:

  • Plan administrators, trustees and investment managers;
  • Individuals exercising discretion in the administration of the plan; and
  • Members of a plan’s administrative committee (if applicable) and those who select committee officials.

Who is Not a Fiduciary?

Generally, if not exercising any discretion, the following would not be considered fiduciaries:

  • Attorneys
  • Accountants
  • Actuaries

Also if performing ministerial tasks the following are not considered fiduciaries:

  • Record-keepers
  • Third Party Admin

What Does it Mean to be a Fiduciary?

According to the IRS,  the five main duties of a Retirement Plan Fiduciary are:

  • acting solely in the interest of the participants and their beneficiaries;
  • acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
  • carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters;
  • following the plan documents; and
  • diversifying plan investments.

What is a Breach of Fiduciary Duty Law?

A breach of fiduciary duty law occurs when a fiduciary acts in a manner adverse to the interests of the client or obtains a personal benefit at the expense of the client. Any time a fiduciary fails to act in the best interest of his or her client, a breach may occur.

What are the Possible Consequences of a Fiduciary Breach?

Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions. A fiduciary’s liability for a breach may also include a 20 percent penalty assessed by the Department of Labor (DOL), removal from his or her fiduciary position and, in extreme cases, criminal penalties.

What Steps Can a Fiduciary Implement to Reduce the Liability?

Fiduciaries can limit their liability in certain situations. One way fiduciaries can demonstrate that they have carried out their fiduciary responsibilities properly is by documenting the processes used to carry out their fiduciary responsibilities.

A fiduciary may also hire a service provider or providers to handle fiduciary functions – setting up an agreement so that the person or entity then assumes liability for those functions selected. For example, if an employer contracts with a plan administrator to manage the plan, the employer is responsible for the selection of the service provider, but is not liable for the individual decisions of that provider. However, an employer is required to monitor the service provider periodically to ensure that it is handling the plan’s administration prudently. As an additional protection for plans, every person, including a fiduciary, who handles plan funds or other plan property generally, must be covered by a fidelity bond, a type of insurance that protects the plan against loss by reason of acts of fraud or dishonesty on the part of individuals covered by the bond.

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