The Educated Fiduciary: Why Plan Sponsors Should Send Their Committee Members to School
Becoming an ERISA fiduciary doesn’t require any specific experience or certification. You don’t even need to acknowledge that you are a fiduciary. If you act like a fiduciary – such as by selecting investments or ruling on participant claims – you are one. It’s that simple.
Why is it important to know this?
Because plan sponsors often appoint executives to their plan committees who may be knowledgeable in matters such as finance but have no specific background in plan requirements and fiduciary best practices. In fact, study after study has shown that an alarming percentage of plan sponsors and plan committee members don’t understand that they are ERISA fiduciaries or the responsibilities that come with fiduciary status.
Why Lack of Training Matters
This failure to understand how they must operate exposes fiduciaries and plan sponsors to lawsuits. It also hurts participants who may have a plan that isn’t run properly and has poorly performing and expensive investments.
While there isn’t any legal requirement that committee members have fiduciary training, Department of Labor (DOL) auditors will ask about it. They also view training as an indication that the members take their responsibilities seriously.
Good fiduciary training can also help win lawsuits. In a recent court decision involving New York University, the court dismissed claims of fiduciary breach because the committee was able to demonstrate that it followed a good process in selecting and monitoring investments. That decision includes a lengthy discussion of the committee’s activities and decision-making. For these reasons, plan sponsors should strongly encourage their committee members to get fiduciary training before they become involved in a lawsuit that they are not well-prepared to defend.
Topics to Cover in Training Sessions
As someone who does fiduciary training, I can tell you that it should start with the basics – the prudent expert standard for investments, and requirements to diversify investments and avoid prohibited transactions. Don’t assume that all committee members already understand these fundamental fiduciary principles.
Training should also include lots of other things, such as:
- The types of investments: passive vs. active management and understanding target date funds (a popular but complicated default investment).
- How to understand and evaluate direct and indirect plan fees.
- How to use ERISA safe harbors to limit fiduciary responsibility.
- How to run an effective committee meeting.
- The importance of developing plan policies to put good procedures in place. Foremost among these is the investment policy statement, which sets the standards for picking and replacing investment options.
- The role different parties, such as TPAs, investment advisers and investment managers, can play in mitigating fiduciary responsibility.
- Current enforcement priorities of the agencies that enforce ERISA. For example, the DOL currently has a project to review what fiduciaries are doing to find missing participants.
- Administrative and reporting responsibilities. Good checklists can make sure that nothing falls between the cracks.
- Cybersecurity. Committees need to make sure their company’s and their vendors’ data are secure.
- How to get the right fiduciary liability insurance.
Who Can Provide Fiduciary Training?
Lots of players in the field say they provide fiduciary education, but some programs are better than others. You can get training from:
- Your investment adviser.
- Your ERISA counsel.
- The government. The IRS runs webinars on compliance, and the DOL runs live programs on fiduciary responsibility in different locations throughout the country.
- Private programs sponsored by different industry organizations.
The focus of these programs can vary depending upon who is giving the training. In my view, ERISA counsel is best positioned to address fiduciary governance, best practices suggested by recent lawsuits, and tax qualification issues, which are really legal matters. However, investment advisers also give this training, and may cover it in their services agreements. Government programs will focus on compliance and current agency initiatives. All of these options are valuable and will help committee members become educated fiduciaries.
Need for Periodic Updates
Just as lawyers and accountants must take continuing education courses to keep up with current developments, committee members should take regular refresher courses to keep up with new plan requirements and practices. Making fiduciary education an ongoing process rather than a one-time event will help protect your plan, its participants and your committee members.
Learn More About How to Be A Better Fiduciary
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Carol I. Buckmann, JD is the co-founding partner of Cohen & Buckmann, P.C. (www.cohenbuckmann.com). She is one of the top-rated employee benefits and ERISA attorneys in the U.S., and deals with some of the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities and investment fund formation.
The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust™, its subsidiaries or affiliates.