It’s hard to be an ERISA trustee. Many plan trustees have other pressing corporate responsibilities and few have the time or experience to become fiduciary governance experts. But fiduciary governance need not be a complicated subject.
Good fiduciary governance, whether done for a massive $10 billion pension plan or a small 401k with a couple dozen participants, comes down to a few fairly simple processes.
At its core there are six central duties an ERISA trustee is obligated to fulfill. For each of these six duties of care a fiduciary committee will adopt a policy that addresses each of these distinct duties. Finally, the fiduciary committee will identify several procedures or audits that can be conducted each year which test whether the policies, inspired by the statutes, have been fulfilled. The duty informs the policy which informs the procedures which are tested annually to demonstrate that the policy and the duty have been fulfilled.
Case Study re Duty of Loyalty
Following is an example of how this governance process would be followed for an ERISA trustee’s duty of loyalty. The US Code directs, “A fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries.” This is called the fiduciary’s Duty of Loyalty or the Sole Interest Rule. This language is echoed in the Code of Federal Regulations at §2550.404a-1(a).
In response to this affirmative Duty of Loyalty, a Fiduciary Committee would first establish a policy that says something like, “It is the policy of the XYZ Co. Fiduciary Committee to discharge its duties with respect to a plan solely in the interest of the participants and beneficiaries.”
Next, the Fiduciary Committee would establish a series of procedures or audits to test if this particular duty is being fulfilled. A review of case law and recent writings on the Duty of Loyalty will identify several areas where further investigation is deserved:
1) Loyalty by the Committee to the plan participants:
- To fulfill this Duty of Loyalty, the Fiduciary Committee has requested that every member of the Fiduciary Committee submit a written declaration that they have received no other compensation or benefit from any party for services they have provided to the plan. (No gifts, no trips, no personal perks, no cash, etc.)
2) Loyalty by vendors to the plan:
- To fulfill this Duty of Loyalty, the Fiduciary Committee has requested that every vendor who provides services to the plan submit a written declaration that they have received no other compensation or benefit from any party other than the plan itself for services the vendor has provided to the plan.
- Note, the DOL and the SEC are both working on new definitions and rules related to vendors and advisors who provide products and services to ERISA plans. Big changes are on the horizon.
3) Loyalty by the plan sponsor to the plan:
- To fulfill this Duty of Loyalty the Fiduciary Committee has engaged [CPA FIRM] to conduct a financial audit of the plan assets. The auditor made the following findings:
- All eligible employees have the same opportunity to participate;
- The assets of the plan are fairly valued;
- The contributions to the plan have been made in a timely manner;
- The accounts of the participants are fairly stated;
- Benefit payments were made according to the terms of the plan;
- There have been no transactions made which are prohibited under ERISA; and a copy of the auditor’s findings and recommendations have been included in the Fiduciary Committee’s compliance library.
Further, there are additional tests that demonstrate the Duty of Loyalty has been fulfilled.
- A Policies and Procedures Manual has been adopted and followed.
- The Fiduciary Committee has created an inventory of parties (employees and vendors) who owe fiduciary duties to the plan.
- The members of the Fiduciary Committee have received educational training on the “two-hat rule” (USC §1002(21)(a)), which defines when an employee of the plan sponsor is and is not acting in a fiduciary capacity to the plan and its beneficiaries.
Following is a link to a eBook we developed which gives a comprehensive review of an ERISA trustee’s duties and the checklist of information that should be included in their governance records.
Josh Yager, Esq., CFP®, ChFC®
Anodos helps trustees (ERISA, individual, and endowment) save time, reduce their personal risk, and fulfill their fiduciary duties. We do this by helping the trustee conduct audits of the money managers to whom investment duties have been delegated. Fiduciaries have an affirmative duty to provide ongoing and independent oversight of the money managers. What makes us unique is that we do not manage money or sell insurance. Doing fiduciary audits, benchmarking studies, and performance attribution is all we do.
We do what trustees should do, but don't know how
Anodos develops and maintains an investment governance process for trustees so that their fiduciary duties are fulfilled.