Fiduciary Guide. How to Help Meet Your Retirement Plan Fiduciary Responsibilities. ADP Retirement Services

Transcription

1 ADP Retirement Services Fiduciary Guide How to Help Meet Your Retirement Plan Fiduciary Responsibilities FOR PLAN SPONSOR/FINANCIAL ADVISOR USE ONLY NOT FOR DISTRIBUTION TO THE PUBLIC.

2 Who Are Plan Fiduciaries? Your plan must have at least one named fiduciary designated in your plan document that is identified by office or by name. For some plans, the designated fiduciary may be an administrative committee or the company s board of directors. A plan s fiduciaries typically include the trustee, investment advisers, often the employer that sponsors the plan, individuals exercising discretion in the administration of the plan and, in some cases, the members of the plan s administrative committee. As a retirement plan sponsor, you are offering your employees an opportunity to save for their retirement. At the same time, it s critically important that you meet your fiduciary responsibilities as specified in the Employee Retirement Income Security Act of 1974, as amended (ERISA). This brochure provides an overview of ERISA and a general roadmap that can help you meet your fiduciary obligations. A Fiduciary s Role Because they act on behalf of the plan s participants and their beneficiaries, a plan s fiduciaries are subject to specific standards of conduct. Some of these responsibilities include: Acting solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them. Carrying out their duties prudently. Following the plan documents (unless inconsistent with ERISA). Diversifying plan investments. Paying only reasonable plan expenses. 2 Fiduciary Guide FOR PLAN SPONSOR/FINANCIAL ADVISOR USE ONLY.

3 Keeping Participants and Beneficiaries Informed About the Plan Under ERISA, there are a number of documents that a plan s administrators must make available to participants and their beneficiaries. The most important of these include: The Summary Plan Description (SPD): The SPD provides a plain English overview of the plan and, among the most important information it must include are the following: When and how employees become eligible to participate in the plan. The source of contributions and contribution levels. The vesting period (that is, the length of time a participant must participate in the plan to be entitled to receive all or a portion of his or her account). How to file a claim for the plan s benefits. The plan participant s basic rights and responsibilities under ERISA. The SPD must be given to employees when they join the plan and to beneficiaries (including alternate payees, such as ex-spouses, under a qualified domestic relations order ) after they first begin to receive benefits. In addition, the SPD must be provided on request, as well as redistributed periodically to participants and beneficiaries. The Summary of Material Modification (SMM): The SMM describes changes to the plan or to the information in the SPD. The SMM, or an updated SPD, must be given to employees when they are first eligible to join the plan and to beneficiaries after they first begin to receive benefits. SMM changes also must be given to existing participants, and beneficiaries who are receiving benefits within a certain amount of time after a change. Account Statements: The account statement, which must be provided on a quarterly basis for defined contribution plans in which participants control their own investments, typically includes information about the participant s account balances and vested benefits and certain other required disclosures and information. Participant Fee Disclosure: The Participant Fee Disclosure describes general plan information, plan fees and investment information. The Participant Fee Disclosure must be distributed at least once every 12 months to eligible employees, participants (including terminated employees with a vested account balance), alternate payees under a QDRO with an account balance, beneficiaries of a deceased participant with an account balance, and newly eligible employees prior to making investment allocations. A Summary Annual Report (SAR): The SAR describes the financial information in the plan s Annual Report (Form 5500) and must be provided annually to participants. Feature-Driven Notices: If your plan contains certain optional provisions, there may be additional documents or notices that must be provided to participants. For example, plans that automatically enroll participants, cause participants to invest in a default fund (often, a Qualified Default Investment Alternative or QDIA ) or use safe harbor contributions are required to periodically distribute notices to participants about these features. Blackout Notices: Participants must generally receive a notice at least 30 days (but not more than 60 days) before the plan is closed to transactions (that is, the plan has a blackout period of at least three business days). During blackout periods, participants and beneficiaries cannot engage in various transactions, which may include making contributions, taking loans, requesting distributions or making investment elections. In most cases, a blackout period occurs when the plan changes recordkeepers or investment options, or when the plan adds participants due to a corporate merger or acquisition. Reporting to the Government Plan administrators are generally required to file a Form 5500 Annual Return/Report with the federal government. Form 5500 provides information about the plan to the U.S. Department of Labor, the IRS, the Pension Benefit Guaranty Corporation, participants, and the public. The Department of Labor and IRS may assess penalties for not filing the report since filing requirements and the Form itself change from time to time, it s helpful to review the latest requirements at FOR PLAN SPONSOR/FINANCIAL ADVISOR USE ONLY. Fiduciary Guide 3

4 A Party of Interest with Respect to an Employee Benefit Plan is Defined Under ERISA as: A fiduciary, counsel or employee of such employee benefit plan: A service provider; An employer any of whose employees are covered by the plan; An employee organization whose members are covered by the plan; A 50% or more direct or indirect owner of such employer or employee organization; A spouse, ancestor, lineal descendent, or spouse of a lineal descendant of any of the persons above except an employee organization; A corporation, partnership, trust or estate of which 50% or more is owned directly or indirectly by persons above (other than relatives); An employee, officer, director or 10% or more shareholder of any of the employee benefit plan or person mentioned above except a fiduciary or a relative; and, A 10% or more direct or indirect partner or joint venturer of any person mentioned above except a fiduciary or relative. Prohibited Transactions There are a number of entities that are prohibited from conducting specified transactions with a plan covered by the Internal Revenue Code and/or ERISA, unless a statutory or regulatory exemption applies to permit the transaction. These include the employer, a union, plan fiduciaries, service providers, as well as owners, officers, and relatives of some of these parties (collectively referred to as parties in interest to the plan). Examples of prohibited transactions are the following: A sale, exchange, or lease between the plan and party-in-interest. Lending money or the extension of credit between the plan and party in interest. Furnishing goods, services or facilities between the plan and party-in-interest. Other examples of prohibited transactions relate to fiduciaries that use the plan s assets for their own interest, who act on both sides of a transaction involving a plan, or receive money from a third party in connection with a transaction involving the plan. Plan Exemptions It s important to note that there are exceptions in the law that protects the plan when it conducts necessary transactions that would otherwise be prohibited. These include certain dealings with banks, insurance companies and other financial institutions that are essential to the ongoing operations of the plan. For example, the plan can hire a service provider as long as the services are needed to operate the plan and the compensation paid for those services is reasonable. Another important exemption is the ability of the plan to offer participant loans. In order for this to occur, among other requirements: Loans must be made according to the provisions in the plan. They must be available to all participants on a reasonably equivalent basis. The plan must charge a reasonable rate of interest and be adequately secured. Fees and Expenses Plan fees and expenses are important considerations for a plan fiduciary. Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary s responsibility. This responsibility is ongoing. Most plan service providers are required to provide disclosures about their fees and compensation to the plan fiduciary who is responsible for hiring and monitoring the performance of plan service providers (often, the employer). Some service providers also must provide information about plan investments. You should review these documents, and after careful evaluation during the initial selection, you will want to monitor plan fees and expenses to determine whether they continue to be reasonable in light of the services provided. For plans that allow participants to direct the investments in their accounts, plan and investment information, including information about fees and expenses, must be provided to participants before they can first direct investments and annually thereafter. In addition, fees and expenses actually paid by participants must be disclosed at least quarterly. If the information previously delivered to participants changes, updates must be provided. Participants who must receive disclosures include eligible employees not currently participating, actively employed participants, terminated participants, and beneficiaries with account balances and individuals who have rights under a qualified domestic relations order. 4 Fiduciary Guide FOR PLAN SPONSOR/FINANCIAL ADVISOR USE ONLY.

5 Strategies to Help Limit Your Liability Needless-to-say, with these fiduciary responsibilities there are also potential liabilities. In particular, fiduciaries who do not follow the basic standards of conduct set forth in ERISA may be personally liable to restore any losses to the plan. The fiduciary may also be required to restore any profits made through improper use of the plan s assets resulting from their actions. However, there are a number of strategies that fiduciaries can use to help limit their liability in certain situations. These include the following: Document Your Actions: One way fiduciaries can demonstrate that they properly carried out their responsibilities is to document the processes used to carry out their actions. For example, you should adopt an Investment Policy Statement that provides for how the plan s investments will be selected and monitored. Offer Suitable Investments: Another way to help limit potential liabilities is to give participants control over the investments in their accounts. Section 404(c) of ERISA and U.S. Department of Labor regulations under that section describe how fiduciaries can limit their potential liability for participants exercise of control over their own account. Under the U.S. Department of Labor regulation, participants must be given the opportunity to choose from a broad range of investment alternatives. For participants to be considered to have exercised control over their own account, the U.S. Department of Labor specifies that (i) there must be at least three investment options with materially risk and return characteristics so that employees can diversify their assets and, among other requirements, (ii) plan participants must be given sufficient information to make informed decisions about the investment options offered in the plan and (iii) participants also must be allowed to make changes to their investment allocation at least once a quarter. You may also want to designate a default fund for the investment of amounts for which participants have failed to give proper investment instructions. You may wish to designate a fund that is a qualified default investment alternative as defined in U.S. Department of Labor regulations (for example, a lifestyle or target date fund that meets the regulations requirements) and meet the other requirements of the regulations. This can provide you with fiduciary protection regarding default investments. If an employer sets up their plan in this manner and follows the other rules under Section 404(c) or ERISA, a fiduciary s liability can be limited for the investment decisions made by participants (that is, the participants actual investment allocation among the funds the plan makes available). However, keep in mind that a fiduciary retains the responsibility for: (1) selecting the providers of the investment options, (2) selecting the investment options themselves and (3) monitoring the performance of the investments in the plan. Continually Educate Plan Participants: Our ongoing employee education program, iplan.isave.ibenefit, can help participants in making their investment decisions and help you meet your fiduciary requirements. Retain a Service Provider: A fiduciary can hire one or more service providers to handle certain fiduciary or nondiscretionary administrative functions and set up an agreement so that the person or entity then assumes liability for the functions selected. If an employer appoints an investment manager that is a bank, insurance company, or registered investment adviser, the employer is responsible for the selection of the manager, but if the manager is properly appointed, is not liable for the individual investment decisions of that manager. However, an employer is required to monitor the manager periodically to assure that it is prudently handling the plan s investments. Be Aware of Other Plan Fiduciaries A fiduciary should be aware of others who also serve as fiduciaries to the same plan. That s because all fiduciaries have potential liability for the actions of their co-fiduciaries. For example, if a fiduciary knowingly participates in or conceals another fiduciary s breach of responsibility, or does not act to correct it, that fiduciary may be liable as well. FOR PLAN SPONSOR/FINANCIAL ADVISOR USE ONLY. Fiduciary Guide 5

6 Fiduciary Checklist As you have seen, there is a great deal involved with meeting your fiduciary responsibilities. To be sure you re on the right track, review the checklist below.* Have you identified your plan s fiduciaries and are they clear about their fiduciary responsibilities? Have you developed an Investment Policy Statement? R R Do you offer an investment line-up that complies with ERISA section 404(c) and meet the other regulations? Have you completed all necessary government filings, such as Form 5500? Have you distributed the Summary Annual Report to all participants? R R Have you provided sufficient information so a plan participant can make informed investment decisions? R R Are you aware of the schedule to deposit participants contributions in the plan and have you made sure it complies with the law? R R If you are hiring third-party service providers, have you looked at a number of providers, given each potential provider the same information and considered whether the fees are reasonable for the services they provide? R R Are you monitoring your plan s service providers? R R Are you reviewing plan fees and expenses so they continue to be reasonable in light of the services provided? Have you distributed the Participant Fee Disclosure to all participants? Have you identified parties-in-interest to the plan and taken steps to monitor transactions with them? R R Are you aware of the major exemptions under ERISA that permit transactions with parties-in-interest, especially those key for plan operations (e.g., making plan loans to participants)? R R Have you reviewed your plan document in light of current plan operations and made necessary updates? After amending the plan, have you provided participants with an updated SPD or SMM? R R Do those individuals handling plan funds or other plan property have a fidelity bond as required under ERISA? R R Have you considered optional fiduciary liability insurance, which covers fiduciary breach claims and helps protect the personal assets of plan fiduciaries? (Fiduciary liability insurance may be purchased as a rider to officer s and director s coverage or as a stand-alone policy.) * ADP does not provide investment or legal advice. This checklist is not intended to be comprehensive and may not address all matters that pertain to your plan. Please consult with your own tax or legal adviser for advice regarding your own plan or company. FIDUCIARY QUICK TIPS Create a plan committee Establish proper procedures Comply with ERISA Section 404(c) Create an Investment Policy Statement (IPS) Consider offering a Qualified Default Investment Alternative Monitor the plan s investments and service providers Document your decisions and actions 6 Fiduciary Guide FOR PLAN SPONSOR/FINANCIAL ADVISOR USE ONLY.

7 ADP Retirement Services Can Help We stand ready to help you develop a roadmap in order to meet your fiduciary responsibilities and reduce your liabilities. For additional information or assistance, please contact your ADP Retirement Services Client Service team. Web Resources for Plan Administrators Department of Labor Employee Benefits Security Administration Internal Revenue Services, Employer Plans Benefit Links 401(k) Help Center ADP Plan Resource Center These links are provided for your information only. ADP does not endorse nor does it accept any responsibility for their content, products and/or services provided by non-adp sites. Some information provided in the ADP sites is provided by third parties. ADP does not independently verify this information, nor does ADP guarantee its accuracy or completeness. FOR PLAN SPONSOR/FINANCIAL ADVISOR USE ONLY. Fiduciary Guide 7

8 ADP Retirement Services 71 Hanover Road Florham Park, NJ ADP, LLC and its affiliates do not offer investment, financial, tax or legal advice or management services, or serve in a fiduciary capacity with respect to retirement plans. The foregoing is a general discussion of fiduciary duties and nothing in these materials is intended to be, nor should be construed as, advice or a recommendation for a particular situation or plan. Please consult with your own advisors for such advice. ADP and the ADP logo are registered trademarks of ADP, LLC. ADP A more human resource. is a service mark of ADP, LLC Copyright ADP, LLC. ALL RIGHTS RESERVED. FOR PLAN SPONSOR/FINANCIAL ADVISOR USE ONLY NOT FOR DISTRIBUTION TO THE PUBLIC.