Even as The Department of Labor continues efforts to clarify the fiduciary rule, it’s critical for plan sponsors to understand and act in accordance with the fundamentals of the role under the standards of ERISA law. Here is a helpful snapshot of what every retirement plan sponsor needs to know and do.
The Highest Duty Known To Law
The role of plan sponsor automatically comes with an additional “job title”–fiduciary: “a fiduciary is anyone who exercises discretionary authority or control over the plan itself….” The fundamental responsibilities of fiduciaries are defined by ERISA, which became law in 1974. Subsequently, the 1982 case of Donovan v. Bierwirth, “established that the fiduciary duty is the highest duty known to law.” Indeed, experts remind us: “Retirement plan fiduciaries are making decisions that affect plan participants’ retirement savings, and for many participants, it is the largest sum of money they will ever see….” Essentially, once a company makes a business decision to sponsor a retirement plan, the sponsor is acting on behalf of the plan and its participants, and therefore, the associated responsibilities fall under the standards of ERISA.
A mistake that plan sponsors frequently make is believing that once providers have been hired to carry out the day to day operations, the sponsor is “off the hook” as a fiduciary. This is simply not true–ever, though it is critical to secure appropriate expertise for the plan. Following the prudent expert rule, fiduciaries must “make decisions for participants with the care, skill, prudence and diligence that an expert would,” and as Jonathan Young, a leader at Capital Group further explains:
Prudent decisions require appropriate knowledge….Anyone who is in a fiduciary role who does not have that knowledge, experience and expertise needs to find somebody who is appropriately knowledgeable to help with fiduciary decisions. It is important to remember that even when services are contracted out, the named fiduciary continues to have the obligation to prudently monitor providers who carry out fiduciary tasks. “The question often comes up, how do you avoid fiduciary responsibility and fiduciary liability?” noted Young. “The answer is you can’t. Service providers can and do take on fiduciary responsibility, and it can certainly lessen a plan sponsor’s fiduciary burden, but it never – I want to repeat never – goes away. A fiduciary who fails to meet their responsibility when selecting, when hiring, when monitoring their service providers, may very well end up liable for any of the failings of those hired service providers.”
While holding the ultimate responsibility for the hiring and monitoring of all service providers involved in a plan, sponsors must focus on ensuring the plan is actually benefiting participants. Young offers this this guidance related to the fiduciary responsibilities associated with the requirement of exclusive benefit:
Plan sponsors must look out for the exclusive benefit of plan participants and their beneficiaries. They cannot look out for their own interests, the company’s interests or even the interests of other employees. “You only worry about the participants of the plan, and sometimes that makes it challenging….We’ve all heard stories of plan sponsors making decisions out of litigation fear. If you’re concerned about getting sued, I would argue that is self-interest and likely a breach of fiduciary duty.”….Furthermore, choosing the lowest cost option for plan expenses is not a fiduciary safe harbor….ERISA requires fiduciaries to pay no more than what is reasonable in fees, but it never directs fiduciaries to choose the lowest-cost or cheapest option.
When it comes to the investment options offered to plan participants, sponsors must ensure diversification, but avoid overcomplicating, or allowing some options to continuously underperform. When considering the investment diversification requirement, Young advises: “Plans can include several options such as stocks, bonds and cash alternatives, and plan sponsors must educate participants about their options….While it’s not a requirement, it may be a best practice to simplify investment menus to avoid overwhelming participants….The largest retirement plan in the country, the Federal Employee Retirement Savings Plan (FERS), offers just five distinct investment options plus a target-date series….”
Experts further point out that in addition to the risk of fiduciary breach allegations resulting in costly lawsuits, plan sponsors can be audited and investigated. Indeed, the DOL maintains a robust civil investigation program. Groom Law Group provides this chart to help plan fiduciaries further understand the penalties and fee increases associated with violations of the various aspects of ERISA.
Understanding ERISA Fidelity Bonds
ERISA fidelity bonds protect the retirement plan against acts of fraud or dishonesty, and are specifically required by Section 412 of the Employee Retirement Income Security Act. As a leading national provider, listed with the Department of the Treasury, Colonial Surety helps plan sponsors ensure compliance. Uniquely, Colonial includes retroactive ERISA fidelity bond coverage for years when the plan was not adequately covered. Additionally, plan sponsors can opt for comprehensive, multi-year coverage packages, ensuring the ERISA bond remains Department of Labor compliant for the life of its term.
Although ERISA bonds are required by the DOL, they do not protect plan sponsors in the event of allegations of ERISA breaches. However, by opting for a convenient and affordable package from Colonial Surety, sponsors can protect themselves and their businesses. Armed with Fiduciary Liability coverage from Colonial Surety, for a few dollars a day, you’ll have defense costs and penalty limits up to $1,000,000 if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber liability coverage is included at no extra cost, providing additional protection–for the plan and your company–against regulatory actions related to data and privacy, as well as expert response services.
At Colonial, adding Fiduciary & Cyber Liability Insurance to your ERISA fidelity bond is quick – login to your dashboard, click “upgrade” next to your bond, and get a quote. Our packages are available for 1, 2, and 3-year terms, providing flexibility and locked-in rates:
ERISA Bond+Liability Insurance HERE
Colonial Surety was founded in 1930 and continues giving customers the assurance that they, their businesses, and their clients are safeguarded with the right surety and insurance products at all times. We are a direct and digital insurer offering products through an online platform supported with exemplary customer service. We give customers a simple, direct, and instant service that takes the pain out of buying insurance and bonds. Colonial Surety is licensed in every state in the U.S., rated “A” Excellent by A.M. Best, and listed by the U.S. Treasury as an approved surety.