Plan Sponsors

Fiduciary Responsibility Series

  Part 1: Eye on the target — the basics of fiduciary responsibility

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In a world of changing regulations, shifting market needs and evolving plan designs, defining your fiduciary responsibility as a plan sponsor can be a moving target. The key to keeping your focus in this environment is to establish a consistent process that helps you ensure compliance, reduce risk and maximize outcomes even in the face of changing conditions.

It starts by understanding the obligations of a fiduciary under ERISA, and then implementing a step-by-step plan to meet them. We outline such a plan here, and also introduce the ten most common mistakes fiduciaries encounter, to be more detailed throughout this Series. Being aware of these steps and pitfalls can help you hit the target: becoming a responsible, compliant fiduciary.

A prudent process
The requirements of fiduciary responsibility are rooted in common sense and sound business practice. While specific regulations may change, a prudent fiduciary process should consider several key points.

  • Exclusive Benefit Rule A fiduciary is obligated to carry out his or her fiduciary functions solely in the interests of plan participants and beneficiaries.
  • Prudent Person Standard A fiduciary is obligated to act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use.
  • Comply with Plan Documents Acting in accordance with the terms of the plan document is a fiduciary duty. Fiduciaries should be familiar with the terms of their plan. And the fiduciary should ensure that the plan is administered in accordance with those terms.
  • Selection of Appropriate Investments for Participants ERISA requires the fiduciary to diversify plan investments to minimize the risk of large losses, unless it is prudent not to do so.
  • Selection of Service Providers and the Duty to Monitor A fiduciary must exercise prudence in the selection of service providers and continue to monitor the service providers selected. Prudence focuses on process; it does not require success.

ERISA Essentials:

  • Employee Retirement Income Security Act (ERISA)
  • A 1974 enacted federal law setting minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans
  • Requires plans to provide participants with plan information including important information about plan features and funding
  • Provides fiduciary responsibilities for those who manage and control plan assets
  • Requires plans to establish a grievance and appeals process for participants to get benefits from their plans
  • Gives participants the right to sue for benefits and breaches of fiduciary duty
  • Many amendments have been added to ERISA since its passage in 1974. An up-to-date knowledge of the Act is essential to maintaining fiduciary responsibility.

Fiduciary…or not?
Today’s changing regulatory landscape includes decisions about how to define a fiduciary. Plan sponsors may be affected by these decisions and may need to alter the way they communicate to participants and beneficiaries as a result. Whether you retain fiduciary responsibility or allocate it to others under ERISA, a clear process and detailed documentation are critical to compliance. Plan fiduciaries need to understand their role, often through periodic education or training, and should be fully engaged in the process. Detailed documentation is also critical. Meeting notes with fiduciaries should be taken in greater detail than traditional corporate minutes, and all minutes and materials distributed to fiduciaries should be retained, approved and signed by each fiduciary. In this environment, rigorous documentation is necessary to protect your interests, as well as the interests of the plan.

Seven steps to success
There are some basic steps you can take to help you meet your investment-related fiduciary responsibilities.

  1. Understanding your responsibilities is the first step to avoiding some of the mistakes fiduciaries commonly make (see below).
  2. An Investment Policy Statement, although not legally required, can be a vital tool in selecting and monitoring appropriate investments for participants. If you already have one, make sure you follow it and review it periodically against your operations.
  3. Make sure your investment menu is updated and is aligned with your investment policy.
  4. Similarly, monitor and review your plan’s investment options on a regular basis to make sure your menu options continue to align with your policy.
  5. Detailed and proper documentation protects you as a fiduciary, and also the plan itself.
  6. Providing participants with education and advice can help them make effective portfolio decisions.
  7. Ongoing communications help ensure that participants receive mandated information and helps them make effective portfolio changes.

Common fiduciary mistakes

Plan sponsorship has never been easy, and today’s volatile regulatory and market environment adds more complexity. Listed here are some of the mistakes fiduciaries may commonly make. Avoiding them is more important than ever. Public plan administrators should also be aware that ERISA rules provide helpful guidance and best practice, and may actually be binding in certain states.

Stay tuned for more information from TIAA-CREF about how to address these important concerns.

Top Ten Fiduciary Mistakes:

  1. Failure to follow plan documents
  2. Improper selection of plan investment alternatives
  3. Improper monitoring of plan investment alternatives
  4. Improper selection of plan fiduciaries
  5. Improper delegation of fiduciary functions
  6. Inadequate investment education and disclosure of fees
  7. Undue reliance on an “expert”
  8. Confusion surrounding fidelity bonds and fiduciary liability insurance
  9. Failure to understand and follow restrictions in plan funding vehicles
  10. Failure to disclose plan changes to participants

Explore further
Visit for more in our Fiduciary Responsibility Series and how fiduciaries can address the challenges they face.