3 Assumptions ERISA Makes About Plan Sponsors
Many plan sponsors do not understand the full weight of their fiduciary duty towards the employees participating in the company retirement plan. The Employee Retirement Income Security Act of 1974 (ERISA) lays out standards of conduct for plan fiduciaries. Built into the standards are several assumptions the Department of Labor makes that plan sponsors shouldn’t miss. First lets’ take a look at the language of the law as stated in 29 U.S. Code § 1104:
§1104. Fiduciary duties
(a) Prudent man standard of care
(1) Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) 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 aims;
(C) by diversifying 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; and
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III.
Many plan sponsors understand that they must act solely in the participants interest and have a vague idea that the plan should have reasonable fees. Most miss the assumptions built into the law that provide a fuller picture of what it means to be a plan fiduciary. Assumptions that should give plan sponsors pause to reflect if they are really equipped to take on this responsibility.
You know what you’re paying
The law states that one of the fiduciary’s duties is “defraying reasonable expenses of administering the plan.” The law assumes that the fiduciary knows what the plan costs and knows that the fees being paid are reasonable. This should shake up nearly every plan sponsor out there! Do you know how much you are paying for your current plan? Have you benchmarked the fees to know if they are reasonable or not? You are not required under the law to choose the cheapest fees, but you are required to know that the fees you’re paying are reasonable. In our experience, few plan sponsors do.
You have expertise
The law states that a fiduciary must use “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.” Many plan sponsors zero in on the “care, skill, prudence, and diligence” but miss the assumption that they be “familiar with such matters.”
The law also states that a fiduciary discharges their duty by “diversifying 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.” A fiduciary must prudently diversify the investment options in the plan, unless they can justify that it is prudent not to do so.
Do you have the expertise required to manage your plan’s investments? Do you know if your plan options re sufficiently diversified? If you don’t have expertise in this area, how can you really be acting with “care, skill, prudence, and diligence?”
You have governing documents
The Laws also states that a plan fiduciary acts “in accordance with the documents and instruments governing the plan.” The assumption here is that your retirement plan has governing documents like an Investment Policy Statement (IPS) and that you are following what the plan dictates. Does your plan have an IPS? Do you know if you are following it or not?
In our experience, plan sponsors do want to provide a valuable benefit for their employees, and they do want to act in their best interest. However, most do not have the expertise to really act as the plan fiduciary. This can open the plan sponsor up to all sorts of problems including fines and even lawsuits for not following through on their fiduciary duty.
If you are a plan sponsor and you’re not sure how much you’re paying for your plan or how to manage the investments, we can help. Beacon Wealth Consultants acts as a 3(38) fiduciary investment manager on all the retirement plans we manage. We do several things for plan sponsors:
- We will let you know how much you’re currently paying and what our plans costs. This will help you show due diligence in ascertaining reasonable plan fees.
- We manage all the investments. We have the experience and expertise to manage the plan structure and offer investment choices that are appropriately diversified.
- We help you create an IPS and then we stick to the plan.
- We take on much of the fiduciary liability from the plan sponsor.
- As a bonus, our plans feature faith-based investment options!
Plan sponsors need to know what the law requires, and what it assumes! If you need help, give us a call!