Benefit plans covered by the Employee Retirement Income Security Act (ERISA) come with fiduciary responsibilities. A fiduciary is any person(s) who has discretionary authority in administering, managing, or controlling the assets of a plan. A plan’s fiduciary may be an employer, plan sponsor, plan administrator, trustees, investment managers, or any individual exercising discretion in the administering of the plan. Establishing a benefit plan, choosing the plan’s features, and amending the plan are business decisions, not fiduciary actions.

Fiduciary Requirements

ERISA requires at least one named fiduciary to be listed in the plan’s written documents. The fiduciary acting on behalf of participants in a plan is subject to the following duties:

  • Act solely in the interest of the plan participants and beneficiaries with the exclusive purpose of providing them with benefits;
  • Carry out their duties prudently with care and diligence;
  • Follow the plan documents in accordance with ERISA;
  • Not engage in any ERISA or Internal Revenue Code prohibited transactions;
  • Diversify plan investments to minimize the risk of large losses; and
  • Identify and pay only reasonable plan expenses with plan assets.

A breach of fiduciary duty can result in personal liability and civil penalties.

ERISA Trust Requirements

Plans that are not set up through insurance contracts are required to hold plan assets in trust to ensure the assets are used solely to benefit plan participants and their beneficiaries. The trust is a separate legal entity and segregates assets of the plan from other accounts. Either the plan document or a separate trust agreement must include specific provisions of the trust and must designate the trustee(s).

At least one trustee must be appointed to handle contributions, plan investments, and distributions. Appointed trustees may be an individual, such as an employee of the plan sponsor, a bank, or a trust company.

Withholding retirement plan (e.g., 401(k) plan) contributions from employee’s wages require the money to be deposited in the plan as follows:

  • No later than the 15th business day for plans with 100 or more participants.
  • No later than the 7th business day for plans with fewer than 100 participants.

By withholding health and welfare plan contributions from employees’ wages or receiving direct payment of premiums (i.e., COBRA premium), ERISA requires contributions to be deposited and separated from the assets of the business as follows:

  • Within 90 days of the withholding or receipt of the premiums for plans with 100 or more participants.
  • No later than the 7th business day for plans with fewer than 100 participants.

Contributions made through a § 125 cafeteria plan do not require contributions to be held in a trust.

Service Providers

Due to the complexity of compliance and potential costs of failure to be compliant with certain plan types (i.e., retirement plans), employers often hire outside professionals (third-party service providers) to augment their use of internal administrative committees and their human resources department.

ERISA provides exemptions for using banks, insurance companies, and service providers when their services are necessary to operate the plan, and any service fees imposed are reasonable.

When an employer hires a service provider to perform fiduciary functions for the plan, the service provider is in a position of trust with respect to plan participants and beneficiaries. Fiduciaries are required to carry out activities through a prudent process.

Employers are encouraged to develop an objective process to use during the hiring process. This will ensure the employer considers relevant and important criteria when evaluating potential service providers. Before interviewing potential service providers, employers should understand the following:

  • The types of fees and expenses involved, and a review of those charges as they pertain to investments under consideration and expected services.
  • The specific services that should be contracted (i.e., legal, trustee/custodian, accounting, investment management, investment education, or advice recordkeeping), as well as the types and frequency of reports related to services provided, communications to participants, meetings for participants, and participant investment transfers.
  • The amount of responsibility the service provider is expected to have, including the types of services required to be included in the plan, any customized or added services that will be provided, and other optional features (such as loans, internet trading, or phone transfers).

Hiring a Service Provider

Due diligence in selecting a service provider and executing a service contract is required. The service contract itself must be “reasonable.” Therefore, employers must obtain certain information from potential service providers. Specifically, for a contract to be reasonable, the employer must ensure the service provider has disclosed the following information pursuant to 29 CFR § 2550.408b-2:

  • A description of the services that will be provided.
  • The service provider’s, or their affiliate’s or subcontractor’s, intent to provide services directly to the plan as a fiduciary or registered investment advisor.
  • All compensation (direct and indirect), including compensation paid in connection with terminating the contract they will receive under the service agreement.
  • Whether recordkeeping services are provided to the plan.
  • Where applicable, certain investment disclosures.

Ensuring the contract is reasonable also highlights to the employer whether there are any conflicts of interest that could impact the service provider’s performance. Employers should consider the following when hiring a service provider:

  • General information about the firm and its history, including any business affiliations, financial status, experience with 401(k) plans, and assets under its control.
  • The firm’s business practices, including how plan assets will be invested if the firm will be managing plan investments or how the firm handles participant investment directions.
  • Information about the staff/service providers at the firm and affiliates, including the identity, experience level, and qualifications of staff assigned to the employer’s account and whether any of the firm’s affiliates will be involved with the account.
  • The firm’s business history, including any recent or past litigation or enforcement actions against the firm and any performance record.
  • Whether the firm has fiduciary liability insurance.

In addition to making diligent decisions when hiring service providers, employers must continually monitor service provider performance. Employers should:

  • Evaluate notices received from service providers regarding potential changes to compensation or any other information provided when they were initially or subsequently evaluated by the employer, such as at renewal.
  • Review performance, including following up on any participant complaints.
  • Read any reports generated by the service provider.
  • Audit fees charged by the service provider.
  • Inquire about the service provider’s policies and practices related to trading, investment turnover, and proxy voting, among others.
  • Evaluate the frequency of information received and ensure that frequency allows the employer to adequately monitor investment returns and service provider performance in order to make necessary changes.