Plan sponsors, in accordance with The Employee Retirement Income Security Act (ERISA), must manage retirement plans prudently, following what is known as “the prudent man standard of care.” Though this sounds straightforward enough, what does it really mean, and how can you make sure you are indeed hitting the mark?
Making Informed Decisions and Monitoring Results
Group Law Group reminds us that a fiduciary is defined as a person who “exercises discretion over the management or administration of a plan, including selecting plan investments,” and that under ERISA, fiduciaries are required to:
- Carry out their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;”
- Discharge their duties with respect to a plan “solely in the interest of the participants and beneficiaries;” and
- Act for “the exclusive purpose of providing benefits and defraying reasonable expenses of administration.”
Toward the fulfillment of their fiduciary obligations, plan sponsors must engage in prudent process:
Although there is no one size-fits-all process for fiduciaries, it is important, as applicable to the specific situation, to gather relevant information, consider available courses of actions, consult experts when necessary or helpful,and make reasoned decisions based on all relevant facts and circumstances that they know or shouldknow.It is equally important to document this process to create evidence of ERISA compliance in the event decisions are questioned.
Given the swirl of litigation around fees, it’s not surprising that many plan sponsors have come to correlate prudence with “low-cost.” Choosing the lowest-cost plan options is not, however, automatically the most prudent choice. As experts at Wilmington Trust remind us prudence means using solid processes, consistently:
Some plan sponsors mistakenly assume they are responsible for choosing plans with superior investment performance or at the cheapest overall cost. That prospect is especially concerning, given today’s market volatility, complex compliance tasks, and litigation risks. Numerous court cases over the years have demonstrated that prudence does not directly equate to cost or performance in this context; rather, ERISA focuses on process (what some refer to as procedural prudence). It calls for a process that results in reasonable fees and returns, rather than the cheapest or highest-yield options, but also means that plan sponsors must make informed decisions that benefit the participants’ best interests overall. Maintaining sound, coherent, and well-implemented policies and procedures is crucial to the concept of procedural prudence. Doing so includes governing documentation, investment oversight, third-party oversight, and compliance reporting. These four areas of responsibility create a stable platform for plan management.
Self-Assess and Self-Protect
One way plan sponsors can periodically assess their prudent performance is to honestly ask themselves these six questions, and adjust their actions accordingly:
- Do you have written plan documents and an investment policy statement, and where are they stored?
- Are you hosting an annual plan review, and with whom?
- When was the last time you reviewed your governance process and decision-making process?
- Do you understand selection and oversight of your investment options?
- Do you regularly monitor and evaluate the providers (including service levels and fees) who support your plan?
- Are you aware of cybersecurity best practices and coverage requirements for you as a sponsor and your vendors?
While acting as diligently and prudently as possible on behalf of the plan and participants, plan sponsors need to remember that as fiduciaries, they can be held personally liable in the event of a breach. Moreover, although ERISA bonds are required by the DOL, they do not protect plan sponsors in the event allegations are made. Colonial Surety offers a convenient and affordable package, tailored especially to help plan sponsors mitigate their risks. Armed with our Fiduciary Liability coverage, 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 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:
Liability Insurance for Plan Sponsors 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.