Fiduciary Responsibilities

Who Is a Party in Interest?

Fiduciary responsibilities are spelled out in great detail for institutional plans subject to the federal Employee Retirement Income Security Act (ERISA), which was enacted in 1974 to create a balance between the interests of employers and employees. ERISA's primary objective is to protect benefit plan participants and their beneficiaries.

In addition to provisions concerning reporting and disclosure, eligibility, vesting, and funding, ERISA includes specific fiduciary standards intended to protect participants against losses caused by the intentional or inadvertent actions of the individuals who are entrusted with responsibility with regard to the employee benefit plan. Thus ERISA generally prohibits plan administrators and executives of the plan sponsor from conducting business or transactions with the plan even if the plan would benefit.

"Parties in interest" for your institution's plan that are potentially subject to fiduciary responsibilities under ERISA include:

• Plan fiduciaries (administrators, officers of the plan sponsor, trustees, and fund custodians, etc.), legal counsel, or employees of the plan;
• Anyone who is providing services to the plan;
• Any employer with employees covered by the plan;
• Any union or employee organization with members who are covered by the plan; and
• Specified relatives (include spouses, parents, children, grandchildren, and in-laws) of individuals included in the categories listed above.

Fiduciary duties

A fiduciary must act solely in the interest of participants and beneficiaries for the exclusive purpose of:

1. Providing benefits to plan participants and beneficiaries; and
2. Defraying reasonable administrative expenses.

A fiduciary must always use the care, skill, prudence, and diligence that any informed person would use under the circumstances. A fiduciary must also ensure that the plan is administered in accordance with the plan documents. Finally, a fiduciary must maintain records of ownership of plan assets, such as stocks, bonds, or certificates of deposit, within the jurisdiction of U.S. courts.

Another fiduciary responsibility deals with the diversification of plan investments. Typically, this is of greater concern to plans that actively manage the investment of plan assets than it is to plans that use a carrier like TIAA-CREF. TIAA and CREF investments are already diversified and should thus satisfy participating institutions' diversification requirements.

A plan fiduciary using insurance contracts or custodial accounts is responsible for their prudent selection. The investment options must be periodically reviewed to ensure that they remain appropriate for the plan. In selecting a carrier, moreover, fiduciaries should conduct an objective and thorough evaluation. One method is a request for proposal (RFP), asking the prospective carrier(s) for financial information, performance data, portfolio breakdown, and investment objectives and, where applicable, ratings from independent industry analysts. For example, what ratings do industry analysts such as A.M. Best Company, Moody's Investors Service, Standard & Poor's, and Fitch give the carrier?

After carefully selecting a carrier, the fiduciary must periodically reassess the carrier's performance — for example, by means of a questionnaire similar to that requested in the RFP. The fiduciary is responsible for eliminating a carrier that once may have been appropriate but becomes inappropriate.

Nonfiduciary task

The Department of Labor lists the following as tasks which do not automatically make the individual carrying them out a fiduciary:

• Applying rules to determine eligibility for participation or benefits
• Explaining the plan to new participants and advising them of their rights and options under the plan
• Preparing employee communication materials
• Collecting contributions and applying them as specified in the plan
• Calculating compensation and service for benefit purposes
• Calculating participants' benefits
• Maintaining participants' service and employment records
• Processing claims
• Preparing reports required by government agencies
• Preparing reports concerning participants' benefits
• Making recommendations to others on plan administration
  
  However, the individual carrying out these tasks may still be a fiduciary if he or she also has authority for plan policy, interpretations and practices.

Protection for fiduciaries

Section 404(c) of ERISA protects a fiduciary against liability for investment losses arising from allocation choices in employee-directed retirement plans if:

• Plan participants can allocate funds among at least three investment categories with materially different risk and return characteristics.
• Each core investment alternative is sufficiently diversified.
• Plan participants can transfer from or among the core and non-core investment alternatives at least once every three months.
• Participants can transfer from or among the core investment alternatives with a frequency that's appropriate to each fund's risk level.
• Participants receive sufficient information to make informed investment decisions about the plan's investment options.

However, it should be noted that giving employees options that satisfy 404(c) requirements does not safeguard a fiduciary against lawsuits for selecting funds imprudently, failing to monitor them for continuing appropriateness, or engaging in a prohibited transaction.

Prohibited transactions

Both the Internal Revenue Code and ERISA contain similar provisions on prohibited transactions. Among other things, ERISA prohibits a fiduciary from allowing the plan to:

• Engage directly or indirectly in selling, exchanging, or leasing property between the plan and a party in interest;
• Provide goods, services, or facilities to a party in interest; or
• Allow loans or extensions of credit between the plan and a party in interest.

ERISA prohibits a fiduciary from:

• Dealing with plan assets in his or her own interest or for his or her own account,
• Causing the plan to engage in any transaction adverse(1) to the interests of plan participants and beneficiaries; or 
• Receiving any consideration for his or her own account from any party to a transaction involving plan assets.
  

Employee contributions should be remitted promptly. Since ERISA requires that plan assets be held in trust or in insurance contracts under a custodial agreement, employers should not delay in remitting contract premiums. An unreasonable delay could cause a failure to comply with the trust requirement and present prohibited transaction issues, particularly if employee contributions are involved.

Most institutions with plans using TIAA-CREF annuities hold funds for only a short period of time before remitting them to TIAA-CREF and other investment firms for allocation to the employees' accounts. In most cases, this will not subject the premium amounts to the prohibited transaction rules that apply to plan assets.

1. An "adverse interest" could be anything different from the interests of the participants and beneficiaries.

Bonding and liabilities

Bonding — ERISA requires all fiduciaries and other persons who handle plan assets or funds to be bonded to protect the plan and participants against loss from fraud or dishonesty. Bonding will be required for plan administrators and other employees of the plan sponsor if:

• The institution holds contributions before they're contributed to the plan, or
• Plan assets return to the institution before becoming vested employee benefits.

The bond of an individual handling plan assets must be at least $1,000 or 10 percent of the amount handled during the preceding reporting year, whichever is greater. The maximum bonding required is $500,000, unless the Secretary of Labor prescribes a greater amount. (This may occur if the Secretary finds the bonding arrangement, or overall financial condition of the plan, inadequate to protect participants.) To determine the potential costs and needs before purchasing fiduciary bonds, you should consult with your institution's attorneys.

Liabilities 

Even if a participating institution's plan is involved in a prohibited transaction, the plan generally won't lose its favorable tax treatment. However, it should be noted that:

• The IRS imposes an excise tax on any disqualified person participating in the prohibited transaction of 15 percent of the value of the plan assets involved in the prohibited transaction. If the violation isn't corrected, the excise tax is increased to 100 percent.
• In addition to excise taxes, a fiduciary can also be found liable in a civil action or subject to criminal penalties.
• And, even if a fiduciary properly delegates specific duties to someone else, the fiduciary remains liable for ensuring that the person given the duties remains fit to be a fiduciary and carries out the duties responsibly.

ERISA also states that plan provisions or agreements attempting to relieve fiduciaries of their responsibilities are null and void. Since a plan can't relieve a fiduciary of liability, some plan sponsors purchase insurance. Before buying insurance, however, sponsors should consider a few factors:

1. First, because coverage varies from policy to policy, be sure to determine whether the kinds of breaches and prohibited transactions the policy covers are relevant to the plan.
2. Second, cost can make the insurance coverage impractical.
3. Third, if the plan buys liability insurance, the insurer must retain the right to recoup payments from the fiduciary. So even if the insurer pays a claim, the plan or individual fiduciary may eventually bear the full weight of the loss. (A fiduciary or the institution could purchase insurance to protect the fiduciary against personal liability. But cost may again prove to be prohibitive, and coverage may not extend to certain types of breaches such as those involving fraud or willful violations.)

How TIAA-CREF can help:

While we are not fiduciaries for your plan, TIAA-CREF supports you by providing administrative services to reduce your administrative burdens and help you avoid errors and oversights that could compromise your fiduciary responsibilities. For example, we provide:

• Step-by-step instructions for completing your required Form 5500 reports
• Sample wording for plan documents, summary plan descriptions (SPDs), summary annual reports and salary reduction agreements
• Employee-specific information, such as spousal consent notifications, to meet regulatory requirements
• Software and technical publications to assist in nondiscrimination testing
• Calculation of maximum contribution limits for employees
• Employee information on premium remittance, account balances, beginning retirement income, payment of death benefits, etc.

Through the website, as well as such publications as the TIAA Investment Profile, TIAA and CREF audited financial statements, and the TIAA Investment Supplement, we offer detailed financial information to help you easily evaluate us as your pension carrier. And, as pension issues and regulations develop, we provide alerts, bulletins, and analyses to keep you fully informed.

For specific questions or general guidance about fiduciary responsibility requirements under ERISA, please call the Administrator Telephone Center at 1 888 842-7782, Monday through Friday, 8 a.m. to 8 p.m. (ET).