Fiduciary Responsibilities

A retirement plan administrator has a fiduciary responsibility to the plan participants, which means that the administrator must manage the retirement plan for the exclusive benefit of plan participants. This means that plan assets must be invested so that:

• The cost of plan assets does not exceed fair market value at the time of purchase.
• A fair return commensurate with the prevailing market rate is received.
• Sufficient liquidity to permit distributions is maintained.
• Safeguards are adopted to ensure the diversity to which a prudent investor would adhere.

Are you a fiduciary? Generally, since you'll be sponsoring the plan, you'll be liable as a fiduciary. There are, however, two ways to escape liability for investment decisions. The first is to contract with a qualified investment advisor and turn over all investment decisions to that person or organization. You'd still be liable for the advisor you selected, if that selection is made carelessly, but at least you would not be liable for the investments themselves.

The Pension Protection Act of 2006 allows qualified fiduciary advisors to offer personally tailored investment advice to employees even if the advisor is affiliated with the investment funds offered. However, the advisor must meet disclosure, qualification, and other self-dealing safeguards. As an employer you are not required to monitor the specific advice given, but you are required to prudently select and monitor the advice provider.

The other way to be relieved of fiduciary liability is to allow your employees to direct their own investments (e.g., through a mutual fund company). There are a number of special requirements you would have to meet, but if you comply with those requirements, your employees will be responsible for their own investment decisions.

Basically, the liability question comes down to the relationship between the parties. If you want to turn over everything to the administrator and have it decide if a claim is covered by the plan, the administrator would be a fiduciary to the plan. On the other hand, if you want to retain control and determine eligibility for benefits, while the administrator just handles the paperwork, the administrator will be a nonfiduciary service provider. The usual case falls somewhere in between, and that's fertile ground for lawsuits.