401k Employer Fiduciary Liability
When an employer provides a qualified retirement plan to employees, you accept the fiduciary responsibilities for making decisions about the plan and choosing investments.
- Anyone named in the plan document as a fiduciary,
- Anyone who gives investment advice for a fee or other compensation, direct or indirect, with respect to plan assets or has any authority or responsibility to do so,
- Anyone who has any discretionary authority or responsibility in the administration of the plan.
ERISA regulations hold fiduciaries personally liable (personal assets are at risk as a fiduciary). ERISA also provides a set of remedies and other potential consequences for breaching duties:
- A Fiduciary must restore to the plan any profits he or she made through the use of plan assets.
- A Fiduciary may be liable for other equitable relief awarded by a court.
- The Department of Labor may assess a civil penalty of 20% of the amount recovered from a Fiduciary for a breach.
- A Fiduciary may be liable for another Fiduciary’s breach through shared responsibilities, unreported knowledge of breaches, or failure of supervision of a subordinate Fiduciary.
ERISA regulations require that fiduciaries consider only the interest of plan participants and their beneficiaries when making decisions about the plan. The law establishes four basic rules:
- Act exclusively in the interest of plan participants and beneficiaries.
- Act with the care, skill, prudence and diligence that a prudent person in a similar role would employ. This rule does not allow you to act as an ‘ordinary’ person; you must generally act an expert.
- Diversify plan investments to minimize losses unless the circumstances indicate it’s prudent not to do so.
- Act in a manner consistent with the plan documents, as long as the documents are consistent with ERISA
ERISA regulations hold fiduciaries personally liable for losses in the plan for failing to perform their fiduciary duties. If you are not an ERISA attorney, you might want to acquire professional help with compliance.
In a September, 2004 article in PLANSPONSOR magazine, Secretary of Labor Elaine Chao wrote,
“In many instances, however, there simply isn’t a clear understanding of what makes someone a fiduciary, and what a fiduciary’s legal obligations are. Executives today need to find out what fiduciary responsibilities they may have for their employees’ various benefit plans, and then make certain they are fulfilling those serious responsibilities. The assignment of fiduciary responsibilities is spelled out in benefit plan documents. Adding to the complexity, however, a fiduciary relationship may be legally inferred from circumstances.”
Fiduciary liability can be mitigated through the adoption of a Fiduciary Charter Approach and the selection of a plan provider/carrier.