What Does Being a “Fiduciary” Mean, Exactly?

fiduciary insights
Any individual or organization that exercises discretion regarding their plan or any plan assets is a fiduciary, which is one of the highest standards in the law. So what does this mean in practice?

OVERSEEING SERVICE PROVIDERS

While plan sponsors can delegate many responsibilities of managing a retirement plan to service providers such as recordkeepers, investment advisors, and others, a plan sponsor cannot completely wash their hands of all fiduciary duty. A plan sponsor must carefully select and monitor their service providers, and is ultimately liable for ensuring the providers are doing right by their employees.

ACTING IN EMPLOYEES’ BEST INTERESTS

A fiduciary must exercise a duty of loyalty by operating the plan in the best interests of participants. After all, the plan sponsor is caring for their employees’ retirement assets. Proceed with caution when considering hiring plan providers that also do work for the company or individual owners. The plan sponsor should not receive any kind of compensation or anything of value from operating the plan. Consider the “smell test.”

SELECTING APPROPRIATE INVESTMENT OPTIONS

Plan sponsors should make sure that participants are offered a diversified set of investment options at reasonable cost, though that doesn’t mean they need to have the lowest fees. However, selecting  the initial plan lineup is not a “set it and forget it” exercise. Sponsors should continue to monitor the investment options available to participants to ensure they are offered investment options that will balance their risk and help meet their retirement goals.

FOLLOWING THE PLAN DOCUMENT

Plan sponsors must operate the plan in accordance with the terms of the plan document. Disconnects are common and usually arise in connection with administering loans, using the wrong definition of “compensation” for purposes of calculating benefits, and with submitting late remittances. Failure to comply can  become an issue, but fortunately, corrective actions are well spelled out by regulators and easy to fix.

MAINTAINING RECORDS

The best protection of all is for plan sponsors to know their plan documents, know what their service providers are doing to support the plan, and make careful decisions – and document them – about all activities relating to the plan. Have on hand all documents that show the plan sponsor’s decision-making process and actions  taken for the benefit of participants as well as how decisions are implemented consistent with terms of the plan. Keep all of those records permanently.

PROTECTING AGAINST LOSSES

Fiduciaries must have an ERISA bond and should consider obtaining fiduciary insurance to cover any losses to the plan caused by a fiduciary breach.

The rules are complicated and the waters are muddied. But there are many resources available to you for more education about your fiduciary duties. Vestwell and Goodwin Procter offer regular webinars on this topic, and we also recommend free programs offered by the Department of Labor.

Regulatory Year in Review

regulatory

By Peter Kennedy, Special ERISA Advisor, Vestwell

2018 continues to be a year of change – – on the regulatory and legislative fronts. From the now-abandoned DOL fiduciary rule to several other bills making their way through Congress, plan sponsors and advisors should understand how these legislative updates affect them and their qualified retirement plans.

The DOL Fiduciary Rule

Among all of the changes in the retirement industry this year, perhaps the most significant was the DOL’s Fiduciary Advice Rule (A.K.A., “the Rule”).  After much debate, the Fifth Circuit Court of Appeals vacated the Rule in its entirety. And, at least for the time being, advisors are once again subject to the pre-existing rules as to what constitutes “investment advice” under ERISA.

What exactly are these pre-existing rules and what do they mean for advisors and their retirement business? We’re glad you asked. Many advisors under the old 5-part test for investment advice regularly helped clients with 401(k) plan design, investment menus, plan education, and other matters – all without the assumption that they were fiduciaries to the plan. The Rule was meant to alter that assumption by characterizing most types of advice to retirement plans and IRAs as “fiduciary advice.” That meant an advisor would have been subject to significant fiduciary liability, but since the Rule has been vacated, advisors are once again free to offer plan advice with less concern for legal ramifications.

Although not directly related to retirement plan assets like the Rule, the SEC recently proposed the Regulation Best Interest (a.k.a. “RBI”) which would impose a higher standard of conduct for broker/dealers and their associated persons who give securities advice to “retail customers.” RBI is not a replacement of the Rule and is generally considered less stringent. With the DOL’s recently announced plan to re-propose its Fiduciary Advice Rule in 2019, there is more coming from the regulators that will likely affect how to advise retirement plans, their participants, and investors.

Other Legislative Matters

Several other bills could change various rules under the Internal Revenue Code and ERISA. Below are some highlights:

Retirement Enhancement and Security Act (“RESA”)

Probably the most far-reaching – and recipient of the most media attention – RESA would make it easier for small employers to participate in Multiple Employer Plans (MEPs). Other features of the bill would affect rules pertaining to auto-enrollment, nonelective contributions, plan loans, certain nondiscrimination rules, and process for selecting lifetime income providers, all of which are intended to encourage small businesses to offer retirement plans to their employees.

Retirement Lost and Found Act

This act also minimizes the administrative burdens on plan sponsors by easing the requirements on them to locate former employees with small, unclaimed distributions. Locating these so-called “missing participants” can be a tedious and costly process for small businesses and the Act would require the government to create an online resource to find these individuals.

In addition to the legislative matters above, other bills have been proposed that cover a variety of topics including increasing the amount that could be distributed to a former participant without consent, simplifying the complex rules related to offering annuities in qualified retirement plans, and changing the default option for delivering plan information to electronic delivery. Stay tuned in 2019 as we continue to monitor new rules that will impact advisors and their firms…and navigate them together.

ERISA Bond vs. Fiduciary Insurance

ERISA bond

By Allison Brecher, General Counsel, Vestwell

With so much attention lately on fiduciary duty, as well as the surge of fiduciary litigation this past year, plan sponsors would be wise to explore their insurance options. While the ERISA fidelity bond (also referred to as a “fidelity bond” or “ERISA bond”), is required for all plans, there are other options as well. By understanding the difference – and the scenarios in which different types of insurance are used – you can help ensure your plan sponsors are properly protected.

The fidelity bond, required by ERISA, protects the plan against losses due to theft and embezzlement. Here’s an easy example: if someone steals money from the 401(k) plan, the ERISA bond compensates the plan for the damages. However, this provides no protection to the plan sponsor because the plan, not the sponsor, is the named insured. Not to mention how limited the application of this bond might be, given the unlikely scenario.

Still, the bond is legally required for anyone who “handles plan assets” (whether a fiduciary or not), and not having one can delay your plan’s Form 5500 filing and potentially result in disqualification, penalties, and personal liability for fiduciaries. Investment managers must have one, but advisors are not required to be bonded unless they make financial decisions about the plan assets or property.

An ERISA bond is easy and relatively inexpensive to obtain; sponsors using Vestwell can apply for one directly from our platform. However, it’s worth noting that the bond must be in an amount of at least 10% of the plan’s assets, and, since it’s been a good year for investment performance, sponsors should make sure their bond amount has kept pace with the plan’s growth in assets.

Some sponsors mistakenly believe they are protected on all fronts by the ERISA fidelity bond, but further protection may be needed. Fiduciary insurance, unlike an ERISA bond, is not included in a typical errors and omissions or directors and officers policy. Fiduciary insurance, as the name suggests, protects the fiduciary from damages that result from a fiduciary breach. Read the fine print on the insurance before moving forward because a fiduciary policy can cover litigation costs, foreign plans that are subject to laws similar to ERISA, and the cost of correcting plan compliance errors resulting from a fiduciary breach. Although fiduciary insurance is technically “optional,” we don’t believe a sponsor should leave anything to chance in the current litigation climate.

Mostly, it’s important for plan sponsors to know the coverage that exists to protect them and their participants, understand the liability they’re taking on, and be comfortable with the decisions they’re making. They’ll be looking to you for help.

“A” Solution, But Not Quite “The” Solution

solutionBy Allison Brecher, General Counsel, Vestwell

As speculation mounts over President Trump’s planned appearance in Charlotte tomorrow, the expectation is that the Retirement Enhancement and Savings Act of 2018 (RESA) will soon be signed into law. While Vestwell believes strongly in the spirit of the bill and what it’s trying to accomplish – making good retirement plans affordable and accessible to companies of all sizes – the bill fails to solve many retirement plan challenges.

Small businesses haven’t historically embraced 401(k)’s out of concerns for fiduciary liability exposure, litigation, fees, and administrative burdens, amongst others. RESA turns to Multiple Employer Plans (MEPs) as a solution because MEPs allow small employers to pool together to share expenses. The belief is that small businesses will be more likely to offer retirement plans once they can offload some fiduciary responsibility and enjoy traditionally “large plan” costs.

Unfortunately, there are still some shortcomings in the bill that lead to missed opportunities and confusion. The main ones we’ve identified are around:

Fiduciary responsibility. While the bill states that fiduciary responsibility can be offloaded, some would argue that is already the case today with a 3(38) offering. It is unclear whether the new bill would offload liability of all responsibilities – such as the responsibility of the plan sponsor to select an un-conflicted provider – but doing so would require a re-write of ERISA laws rather than just a notation in a new provision. In addition, it is not clear who – if not the plan sponsor – is responsible for protecting the plan against conflicts of interest, prohibited transactions, and other such obligations.

Lead participant employer role. What exactly is the role of the lead participant employer? How do they get selected and evaluated? Are they compensated and, if so, how much and who decides? And how does insurance account for this unique role? Without a clear outline of the lead participant role, it is hard to envision the way companies decide to – and continue to – work together.

General retirement plan shortcomings. Unfortunately, a more “fair” cost doesn’t give plan sponsors a better understanding of what they’re getting with a retirement plan. In many cases, fees are buried, service offerings unclear, and administrative burdens cumbersome. The bill does not address any of these challenges.

The good news is, options exist to better support small plan sponsors even without RESA. The advent of tech-forward retirement platforms (like Vestwell) bring solutions to the issues of cost, fiduciary responsibility, administrative burden, and transparency. They also address many of the challenges of RESA. Because a modern-day retirement platform doesn’t require the pooling of resources, a plan sponsor can enjoy custom plan designs and pricing, tailored to its workforce, rather than having to compromise based off the collective needs of the MEP. And since technology automates many expensive processes, plan sponsors are afforded economies of scale comparable to (if not better than) what an MEP would bring. As a result, a company can benefit from the personalization, strong customer service, competitive pricing, fiduciary oversight, and transparency that all plan sponsors and participants deserve.

So, while it is our mission to support the healthy retirement of all Americans, we want to ensure they don’t just have access to a plan… but that they have access to the right one.

Understanding the Risks of Being a 3(38) Fiduciary

3(38) fiduciary

Retirement plan sponsors often turn to their financial advisors to help them handle key responsibilities. Since navigating the legalities and complexities of retirement plans is typically not their core competency, it’s natural for plan sponsors to offload many of the associated tasks required for proper plan administration.

Enter your role as a 3(38) fiduciary.

While you may welcome the business relationship of being assigned as the 3(38) fiduciary, it’s also important to understand the legal implications and risks involved with performing the role.

What’s a 3(38)?

In a retirement plan, 3(38) fiduciaries are given discretion over most decisions regarding investment choices, such as implementing the lineup of suitable and appropriate investment options to be offered in the plan. While plan sponsors are still responsible for overseeing these fiduciaries, they generally transfer much of the risk and responsibility associated with plan monitoring and selection over to a 3(38) fiduciary.

This is unlike the role of a 3(21) fiduciary, also known as a “co-fiduciary,” who has less authority when it comes to plan decisions. While plan sponsors may rely on the advice of a 3(21) fiduciary’s investment analyses and recommendations, it is ultimately the plan sponsor’s role to make major investment plan selections.

Today, the latter relationship is more common, with 82% of retirement plan advisors serving as 3(21) fiduciaries, despite the the number of 3(38) offerings doubling since 2011, likely due to the rise in litigation targeting 401(k) plan sponsors.

With great power, comes great responsibility

While you may charge a premium for performing the 3(38) role, you may not wish to take on the added risk of fulfilling much of the ERISA plan sponsor’s legal requirements. This is especially true for smaller plans where you may not be able to make the business case for the services involved. It’s worth considering the amount of business you’ll be providing in relation to the responsibility that comes with it.

As a 3(38) fiduciary, you are committing to serve as the formal investment manager for an employer’s plan. As such, you will be required to provide regular fiduciary reports to the plan sponsor, and document your rationale for investment and fund change recommendations as well as any time you execute on said recommendations.

Adherence to IPS

With the addition of full investment discretion, you must document that you are adhering to the plan’s Investment Policy Statement (IPS), and that all investment decisions are made in the plan participants’ best interests. You may even be asked to help develop an IPS. Importantly, as a 3(38) fiduciary, your processes and methods must be that much more detailed and circumspect than those of a 3(21) fiduciary.

Expertise Required

Being a 3(38) fiduciary is a specialized role that requires specialized expertise. Advisors who dabble in the 401(k) space and advise only a few plans may not wish to take on the responsibility – and liability – required. Fortunately, that’s where external providers can help with the heavy lifting. Integrated solutions now offer you the option to offload the certain levels of fiduciary liability while still putting the power in the advisor’s hands to personally guide clients with their retirement decisions. We recommend exploring how these options ease the fiduciary liability you carry while giving your sponsors and participants the customized plans and advice they value most from their trusted advisor.

 

Your Clients’ Plan Audit Qs, Answered

 

Plan Audit

If your plan sponsors aren’t already, they should be preparing their year-end report. The penalties for failing to conduct an audit can be substantial. Issues can surface during the audit that may be easier and less expensive to correct now versus down the road.

For plans with 100 or more eligible participants at the start of the plan year, the annual report must include an audit report issued by an independent qualified public account stating whether the plan’s financial statements conform with generally accepted accounting principles. An audit should comfort participants, knowing their plan’s operating processes are in good order.

We’ve put together some common questions and answers to help your plan sponsor understand the audit rules – and so you can ensure your clients are taking them seriously.

IS THE PLAN EXEMPT FROM THE AUDIT REQUIREMENTS?  

Governmental plans, church plans, and certain 403(b) plans that qualify under safe harbor are exempt from the audit requirements.

HOW DOES A PLAN SPONSOR FIND AN AUDITOR?

ERISA requires that the auditor be independent. and Sponsors should utilize a firm that is separate from the employer’s accounting firm and does not do any other business with the company or any of its directors or owners.

HOW IS THE NUMBER OF ELIGIBLE PARTICIPANTS CALCULATED?

The eligibility rules can be complicated.  In general, plans with 80 to 120 participants at the beginning of the current plan year may choose to complete the current annual report using the same “large plan” or “small plan” category used for the previous year. If the Plan previously filed as a “small plan” last year, it may wish to again for the following plan year.

WHAT DOCUMENTS DO PLAN SPONSORS NEED TO PROVIDE?

Every audit is different, but the auditor will likely need to review records relating to participant enrollment, plan contributions and distributions, auto-enrollment, and payroll files. Sponsors may need to provide records relating to tax compliance, related party transactions, and the Plan’s benefits committee (if it has one).

HOW LONG WILL THE AUDIT TAKE?

Sponsors should begin the audit process at least 90 days before the Form 5500 deadline to allow enough time to gather documents, follow up on open items, prepare financial statements, and wrap up.

HOW MUCH WILL THE AUDIT COST?

An auditor may charge $2,500 – $10,000, or more, depending on the size and complexity of the plan.