When CYA is Exposing Rather than Covering Your Assets

shutterstock_286288565.jpgI recently had the privilege of attending the National Plan Advisors Association (NAPA) annual conference where some of the best and brightest minds in the retirement plan industry gather to discuss best practices, pending and recent legislation, and industry trends. In one of the sessions it was noted that it is a fiduciary breach to make decisions just to protect yourself as a fiduciary. For me this was one of those “ah-ha” moments that made me sit back and think about the way that we make decisions as a co-fiduciary. Are we keeping the best interests of the participants first or focusing so myopically on fiduciary best practices from a CYA (cover your behind) perspective that we miss out on the big picture? Since I was forced to contemplate our process, I thought I would also share the basics of fiduciary duty with you as well.

 The plan is in place to serve the best interests of the
plan participants and their beneficiaries.
It’s as simple as that!

 One of the most important ERISA fiduciary rules is the exclusive purpose rule, established by ERISA Sections 403 and 404: “A fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries.” In order to fulfill your requirements of sole interest, ERISA established 4 guidelines for fiduciaries to follow.

  • The first is loyalty. To demonstrate this quality the fiduciary must act for the exclusive purpose of providing benefits to participants and their beneficiaries; and defraying reasonable expenses of administering the plan. In essence this guideline sums up that you work for your plan participants when running the 401(k) plan and it is your responsibility to make sure they get appropriate services for a reasonable fee.
  • The next is prudence. Fiduciaries must act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like goals. This is where the advice of an investment professional can be the most valuable as it is expected for you- the fiduciary – to not just act with good intentions, but also with knowledge and care.
  • The third guideline is diversification of investments. Fiduciaries must diversify the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. In my opinion, this is one of the most difficult demands to balance since most investors expect to have positive returns in their account every quarter despite market conditions or investment mix. However as the plan fiduciary, you have the responsibility to protect the participants from themselves.
  • The final guideline is to follow the plan’s governing documents. Fiduciaries must operate the plan in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with [ERISA] provisions. While this may seem like a “no-brainer”, it is in this guideline where I have seen the most common problems arise. We have seen everything from not having a signed plan document to incorrectly following the plan’s definition of compensation to mismatched vesting schedules.

In nearly all cases, plan fiduciaries act in the best interest of their participants through their actions without even thinking twice about it. However, there are very strict and expensive rules around making sure that you do so consistently and that you don’t inadvertently shift focus from them to you and your assets.

jamie kertis headshotJamie Kertis, AIF®, QKA
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162

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