What are a Plan Sponsor’s fiduciary responsibilities to plan participants?

All pension plans are subject to the Employee Retirement Income & Security Act of 1974, known commonly as ERISA. Therefore, the following rules apply to each plan.

• Each plan must be in writing and identify the named fiduciaries in the document [Section 402(a)].
• The plan must set out a formal investment policy (an Investment Policy Statement), which specifically allocates the duties associated with the plan’s administration and operation [Section 402(b)].
• Each fiduciary must: (a) act solely and on the interest of plan participants and beneficiaries; (b) act with care, skill, prudence, and diligence; (c) diversify the investments to minimize risk; (d) act in accordance with the plan documents [Section 404(a)].
• Fiduciaries can remove their liability by allowing profit sharing and 401(k) participants to select their own investments [Section 404(c)].
• A fiduciary is liable for the breach of a co-fiduciary [Section 405(a)].
• Each fiduciary is personally liable for losses and forgone gains resulting from a breach of his responsibilities, obligations, and duties [Section 409(a)].

Do investment providers such as banks, mutual fund companies and insurance companies act as co-fiduciaries to the Plan?

No, most often they are only providing a product to the plan sponsor (i.e. a mutual fund or separately managed account, record keeping services etc.). The plan sponsor is required to prudently select and monitor the provider’s services to assure they meet the goals and criteria of the Plan.

Can we delegate investment responsibilities to an investment manager?

Yes, a named fiduciary can delegate his investment responsibilities to an investment manager [Section 402(c)(3)] with a written agreement. The agreement will specify the criteria and methods for measuring investment performance. Additionally, it should delineate terms for termination.

How can a 401(k) plan increase employee participation?

First, do a great job of designing a plan to meet the company’s goals, taking into account other pension plans, if any, demographics and employee investment sophistication. If you have an existing plan, you may wish to survey employees about how it could better serve them.

Show participants the company is monitoring the investments by providing them with a quarterly report providing net performance for each fund against an appropriate index. Change funds that no longer meet the Plan’s criteria for investment selection.

Provide ongoing employee education that increases their knowledge incrementally.

Offer one-on-one meetings to new participants by a qualified financial advisor and/or provide a customized retirement report to show if they are on track to meet their retirement goals. Or you may subscribe to an asset allocation service for participants.

Offer a matching contribution designed to your payroll.

Periodically review vesting schedules, entry dates, fund offerings and record keeping capabilities to assure they need the needs of participants and you, the plan sponsor. Note, as technology keeps improving, so do services such as receiving account balances and loan information via the Web.

What criteria should we use in hiring a fund manager?

You should look for all of the following:

• Long-term investment manager tenure.

• Consistent investment philosophy by the manager.

• Reasonable management expenses for the style of fund (i.e. an index fund has very different expenses from an international fund).

• Above average investment performance measured against like funds, with the fund in the top third for five years.

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