Understanding the Roles and Responsibilities of a Fiduciary The retirement plan fiduciary has significant responsibilities. This paper outlines a fiduciary s responsibilities and offers strategies that may help to mitigate their attendant risks. Are You a Fiduciary? It is important to understand whether or not you are a plan fiduciary and the related responsibilities. Protecting the interests of employee benefit plan participants and their beneficiaries is a central objective of the Employee Retirement Income Security Act of 1974, as amended (ERISA). THESE PROTECTIONS, CODIFIED UNDER ERISA, REST ON THREE PILLARS: 1. Requiring the disclosure of financial and other plan information to employees 2. Establishing standards of conduct for plan fiduciaries 3. Providing for appropriate remedies and access to the federal courts The fiduciary plays an indispensable role by being entrusted with the duty to always act solely in the interests of retirement plan participants and beneficiaries. The fiduciary has a number of important responsibilities and is held accountable for meeting them. pnc.com/retirementsolutions 1-855-303-0890
Who is a Fiduciary? 1 2 For a variety of reasons, it is not unusual to find that an individual may unknowingly be functioning as a fiduciary. Consequently, it is imperative that plan sponsors understand who may be deemed a fiduciary with respect to their employee benefit plans. A FIDUCIARY IS DEFINED AS ANY PERSON OR ENTITY WHO: Has discretionary authority or control over the management of the plan Exercises authority or control over the management of or disposition of plan assets 3 4 Provides investment advice for a direct or indirect fee or compensation Has discretionary authority or discretionary responsibility for plan administration An individual can become a fiduciary by being formally designated as such in the plan document. A person may also become a de facto fiduciary by virtue of exercising discretion or providing investment advice even if he or she was never formally appointed as a fiduciary. For example, if an individual recommends investments for the plan, he or she may be considered a fiduciary. THERE ARE THREE PRIMARY KINDS OF FORMALLY DESIGNATED FIDUCIARIES: 1: NAMED FIDUCIARY The first of these is the named fiduciary. The named fiduciary must be specifically identified in the plan document. It is often the sponsoring employer itself or a committee appointed by the employer. The named fiduciary is generally responsible for hiring and firing other fiduciaries, and for making sure that plan fees are reasonable. 2: PLAN ADMINISTRATOR The second kind of fiduciary is the plan administrator, who may be the same entity or person as the named fiduciary. The plan administrator is responsible for managing the day-to-day operations of the plan in accordance with the plan document, submitting government filings, and making required disclosures to employees. 3: PLAN TRUSTEE A third kind of fiduciary is the plan trustee. The trustee may be an individual, committee or third party, such as a bank. ERISA generally requires that plan assets be held in a trust to keep the assets safe. The trustee may have discretion to invest the plan s assets or it may be directed by the employer, an investment manager or other plan fiduciary. Generally speaking, individuals or service providers performing purely administrative functions will not be deemed to be fiduciaries. Attorneys, accountants and actuaries when acting solely in their professional capacities are ordinarily not considered fiduciaries. However, third-party consultants or advisors who are providing investment advice may be viewed as fiduciaries. It bears mentioning that the definitions of investment advice and investment recommendations differ under ERISA and federal securities laws. The Department of Labor recently issued a final rule defining who is an investment advice fiduciary under ERISA. This is a very complex area of the law, and plan sponsors should consult their legal counsel if they are unsure of the fiduciary status of their consultants/advisors. There are business decisions that generally do not give rise to fiduciary status, including, but not limited to, decisions to establish, amend or terminate a plan. However, those implementing such decisions on behalf of the plan may be considered fiduciaries. Fiduciary status is ultimately determined based on a person s actions, not their title. 2 3
What are the responsibilities of a Fiduciary? 1: ACT SOLELY IN THE INTEREST OF PLAN PARTICIPANTS AND THEIR BENEFICIARIES Fiduciaries must act solely in the interest of plan participants and their beneficiaries and for the exclusive purpose of providing benefits to them. This requirement is an overarching duty of loyalty mandate. Fiduciaries must avoid conflicts of interest that can arise when plan decisions are made based on a benefit to the employer or a person related to the plan. For example, a fiduciary should not hire a vendor that provides sub-par services, fees or investments to the plan because the provider sends work or referrals to their business or provides a personal benefit to the fiduciary in connection with the fiduciary s decision to hire the vendor for plan services. 2: DISCHARGE THEIR DUTIES PRUDENTLY The duty to act prudently extends to all fiduciary decisions that affect the plan, including investment selection, the selection of a plan provider and the appointment of plan fiduciaries. Prudence is best defined as acting with the care, skill and diligence that a prudent person in a similar role and familiar with such matters would act under a similar set of circumstances. Otherwise known as The Prudent Man Rule, this concept derives from the common law of trusts and represents an objective standard based on how a person with similar knowledge and experience would act. The duty to act prudently lies at the center of a fiduciary s responsibilities under ERISA. In order to be effective, a fiduciary should be knowledgeable in a variety of areas. Absent such knowledge, a fiduciary may want to hire a professional in the relevant area to help with meeting this responsibility. Fiduciaries should confirm that all decisions are made through a disciplined process that documents the discussion, describes the thought process that led to the decision, and maintains the evidence of the facts gathered that supported the decision. For example, plan sponsors should document the process by which vendors and investments are selected and monitored. 3: FOLLOW THE PROVISIONS OF THE PLAN DOCUMENT, UNLESS THEY ARE INCONSISTENT WITH ERISA The plan document outlines how the plan will operate and, as such, a fiduciary must make certain that such provisions are followed. However, in instances where a plan provision may be in conflict with ERISA, the fiduciary must follow ERISA rules. In many cases, fiduciaries outsource the administrative plan functions to vendors that must follow the plan s provisions. It is the fiduciary s responsibility to confirm that the vendor(s) have the proper controls in place to do so. 4: DIVERSIFY PLAN ASSETS Diversification helps to minimize the risk of large losses to the plan. For a participant-directed defined contribution plan, an investment fiduciary has three fundamental duties under ERISA: Provide a broad range of investment options Select, monitor, remove and replace investment options Provide investment options and related services that are suitable and appropriate for the particular needs and abilities of the employees covered under the plan These duties may be among the most important and daunting of all fiduciary responsibilities. Many individuals lack the requisite skill and experience in making such critical decisions. While a fiduciary cannot subcontract out all of his or her responsibilities, relying on thirdparty investment advisors and other professionals to assist him or her to meet them may help mitigate the risk that comes with the lack of deep knowledge of the issues a fiduciary confronts. When hiring an investment advisor or other professional, a plan fiduciary must investigate the individual s qualifications, provide the individual with complete and accurate information, and confirm that reliance on the individual s advice is reasonably justified under the circumstances. Plan fiduciaries should obtain, in writing, an acknowledgment from the outside advisor that they recognize their fiduciary status and will produce and share regular written reports on the plan s investment performance. 4 5
7: COMMUNICATE INFORMATION TO PARTICIPANTS Plan participants are required to receive information that should help them better understand the operation and financial health of their retirement plan, as well as to enable them to make better decisions for themselves and their beneficiaries. To that end, the following documents must be provided to participants and beneficiaries. 5: PAY ONLY REASONABLE FEES FROM PLAN ASSETS A fiduciary is responsible for making sure that only reasonable fees are paid from plan assets. Plan expenses must be reasonable in relation to the quality of service provided. It is important to stress that this does not mean that ERISA requires the least expensive service provider. Based upon the objectives and circumstances of the plan and its participants, the desire or need for elevated services or greater service quality may justify higher plan fees. Fiduciaries should maintain written records of the periodic reviews of plan expenses, whether that is through a regular exercise that surveys prevailing fee schedules or uses an industry resource. If a plan fiduciary is unclear as to the specific fees the plan and participants are paying for services received, the fiduciary should seek clarity regarding those fees and review 408(b)(2) fee disclosures from the service provider. 6: AVOID PROHIBITED TRANSACTIONS Fiduciaries must avoid conflicts of interest and self-dealing that could harm the plan. In addition, ERISA prohibits certain transactions that could benefit parties that are closely related to the plan such as the employer, statutorily defined owners, plan fiduciaries, service providers and relatives of these parties. In addition to the responsibility a plan fiduciary bears for his own conduct, under certain circumstances he may also be liable for a breach of fiduciary responsibility by another fiduciary with respect to the same plan. Fiduciaries should consult with their legal counsel regarding these co-fiduciary liability rules under ERISA. The Summary Plan Description (SPD) Must be delivered to participants upon joining the plan, to beneficiaries upon receiving benefits, and periodically thereafter or upon request. Summary of Material Modification (or updated SPD) This summary of plan changes must be furnished to participants within 210 days after the end of the plan year in which the change was adopted. Individual Benefit Statement This statement contains personalized information about individual participant account balances and vested benefits. If the plan offers participant-directed accounts, it must be sent quarterly. For traditional pension plans, statements must be provided to individuals every three years. Automatic Enrollment Notice (if applicable) This notice must be provided to plan participants at least 30 days prior to being eligible for the plan, indicating the deferral percentage, and the notice of right to change the default deferral amount or not to make contributions at all. Information about the plan s default investment option also needs to be included. Summary Annual Report (SAR) This report discusses financial information in the plan s Annual Report and must be sent annually to participants, except in the case of a defined benefit plan for which only an annual funding notice is required. Blackout Notice If the ability of plan participants to take certain actions with respect to their accounts will be suspended due to the elimination of a plan investment option or transfer to a new service provider, 30 days advanced written notice to participants is generally required. Participant Notice When a plan allows participants to direct their investments, e.g., a 401(k) plan, the fiduciary is obligated to communicate the rights and responsibilities of the participants under the plan as it relates to making their own investment decisions. This communication needs to include plan and investmentrelated information such as fees and expenses that should help participants make informed decisions. This information must be delivered before they can first direct their investment in the plan and annually thereafter. 6 7
A FIDUCIARY ACTS ON BEHALF OF PLAN PARTICIPANTS AND THEIR BENEFICIARIES AND IS EXPECTED TO: Act solely in the interests of plan participants and their beneficiaries 1 4 Diversify plan assets 2 Discharge their duties prudently 5 Pay only reasonable fees from plan assets 3 Follow the provisions of the plan document, unless they are inconsistent with ERISA 6 Avoid prohibited transactions 7 Communicate information to participants IF YOU WANT TO POTENTIALLY REDUCE YOUR PLAN S RISK PNC Retirement Solutions SM welcomes the opportunity to speak with you about your organization s retirement plan and how we can potentially help you reduce your plan s risk. To get the conversation started, ask your PNC representative for a free plan evaluation. You will receive actionable steps to consider for plan design, administration, employee education, fiduciary protection, investments, fees and more. PNC invites you to contact us: Call 1-855-303-0890 Email vestedinterest@pnc.com Visit pnc.com/retirementsolutions The PNC Financial Services Group, Inc. ( PNC ) uses the marketing names PNC Retirement Solutions SM and Vested Interest for defined contribution plan services and investment options provided through its subsidiary, PNC Bank, National Association ( PNC Bank ), which is a Member FDIC. PNC Bank also provides custody, escrow, and directed trustee services; FDIC-insured banking products and services; and lending of funds. Securities products, brokerage services, and managed account advisory services are offered by PNC Investments LLC, a registered broker-dealer and a registered investment adviser and member of FINRA and SIPC. Insurance products may be provided through PNC Insurance Services, LLC, a licensed insurance agency affiliate of PNC, or through licensed insurance agencies that are not affiliated with PNC; in either case a licensed insurance affiliate may receive compensation if you choose to purchase insurance through these programs. A decision to purchase insurance will not affect the cost or availability of other products or services from PNC or its affiliates. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC does not provide services in any jurisdiction in which it is not authorized to conduct business. PNC Retirement Solutions is a service mark and Vested Interest is a registered service mark of The PNC Financial Services Group, Inc. Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value. 2016 The PNC Financial Services Group, Inc. All rights reserved. 164914-0816 pnc.com/retirementsolutions