Focus
More focus on plan fiduciaries
If ever there was a good time to focus more on your fiduciary responsibilities, it’s now. Major market declines over the past two years and high profile securities/ERISA class actions, where employees suffered losses to their retirement savings, have created an environment where protecting plan participants is paramount. The resulting increase in regulatory scrutiny of a plan sponsor’s role as fiduciary makes the risk of failure to meet these obligations a costly proposition.
Consider that, in the Enron case, where 11,000 employees lost $1 billion in retirement assets, the plan sponsor could be held liable. In fact, the Department of Labor (DOL) has taken an active role in the Enron litigation under ERISA. In that case, the DOL has argued that Enron professionals breached their fiduciary duties by failing to monitor the plan fiduciaries, who, in turn, failed to inform the plan participants of Enron’s financial condition. It remains to be seen whether the DOL’s view will prevail, but the DOL’s involvement in the case sets forth a clearly delineated position of the DOL on many fiduciary issues.
Enron is one of several cases driving regulators to crack down more on plan sponsors and enact legislation to further protect the interests of retirement plan participants. As such, plan sponsors should be sure to understand their fiduciary responsibilities and potential legislation that may impact the performance of these duties.
Fiduciary Basics
A plan sponsor’s duties, as fiduciary, are governed largely by ERISA (Employee Retirement Income Security Act of 1974). For purposes of ERISA, the term fiduciary includes anyone who has:
- Control over management of the plan’s assets
- Responsibility for the administration of the plan or
- Renders investment advice for a fee
According to ERISA, a fiduciary must carry out his/her duties:
- For the exclusive purpose of providing benefits and defraying reasonable expenses of the plan
- With the care and skill of a prudent expert
- By diversifying the investments of the plan, and
- In accordance with the plan documents
As a plan sponsor, you have an inherent fiduciary role, since you have control over the plan. Though you may delegate certain fiduciary duties, such as investment management and trustee activities, you still have a duty to monitor the performance of other fiduciaries. You are also obligated to communicate truthfully to your plan participants and to correct any misleading information they may receive.
Employer securities
Given the recent focus on employer securities, it’s important to understand how your fiduciary responsibilities apply to company stock offered through a savings plan.
For example, designating a plan investment alternative, such as company stock, is considered a fiduciary function. A plan sponsor has a duty to monitor the use of company stock as an investment option to insure that it remains a prudent option. Plan sponsors need to be cognizant of potential conflicts in this area. As a fiduciary, the plan sponsor must act solely in the interests of plan participants. This can potentially create a conflict given the fact that many corporate activities may impact a company’s stock value. How should the fiduciary resolve this conflict? One approach used by many plan sponsors is to use an independent advisor to manage the company stock fund.
Legislation impacting fiduciary responsibilities
Given some of the high profile cases we’ve seen in the last couple of years, new legislation may impact how you perform your fiduciary duties as plan sponsor. Earlier this year, Congress adopted the Sarbanes-Oxley Act of 2002, which:
There are many other legislative proposals currently under review designed to protect the interests of savings plan participants. These proposals contain, among others, the following provisions:
- Amendments to ERISA, requiring diversification in individual account plans holding employer securities.
- A requirement for plans to hold at least 3 options other than employer securities.
- For defined contribution plans, an amendment to ERISA rule 404, which would allow either employer contributions or elective deferrals to be invested in employer stock, but not both.
- Restrictions on blackout periods, which would mean amending ERISA such that the fiduciary safe harbor would not apply for any period in which the participants’ ability to direct investments was suspended.
- A notice and disclosure requirement such that account statements would have to provide information on investments in employer stock. Under the proposed legislation, the DOL could assess $1,000 per day penalty for violations.
Given the current climate and changing regulatory landscape, fulfilling your fiduciary responsibilities can be challenging. CitiStreet can help. On November 19, 2002 CitiStreet hosted a web seminar on Fiduciary Reality – Changing Responsibilities in a Changed World. Please contact your Client Relationship Manager for a copy of the webcast on a disk.
Access to experienced support can help you breathe easier and manage your plan in the best interest of your participants. CitiStreet now offers comprehensive services for fiduciaries, designed to help you understand and meet your fiduciary responsibilities, satisfy your participants and help them reach their retirement goals. To learn more about CitiStreet’s Fiduciary Education and Process Review, contact your Client Relationship Manager.
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