What Is a Plan Fiduciary? Your Duties and Liability

A plan fiduciary holds a position of trust in managing retirement plans, such as 401(k)s and 403(b)s. This role involves responsibilities that directly impact the financial security of plan participants and their beneficiaries. Understanding what a plan fiduciary is and their obligations is essential for anyone involved with such plans.

Understanding the Role

A plan fiduciary is an individual or entity that exercises discretionary authority or control over the management or administration of a retirement plan, or over the management or disposition of its assets. This status is determined by functions performed, rather than by formal title. Someone can become a fiduciary inadvertently if their actions meet the functional definition.

Common examples of fiduciaries include employers sponsoring the plan, plan administrators, members of an investment committee, and trustees. Certain investment advisors who provide advice for a fee regarding plan assets also qualify as fiduciaries. The Employee Retirement Income Security Act of 1974 (ERISA) establishes these definitions and standards for most private sector retirement plans.

Co-fiduciary responsibility means more than one party can share duties for a plan. While responsibilities can be allocated, oversight often remains with the governing body, such as the employer or a designated committee. If a fiduciary knowingly participates in another fiduciary’s breach, conceals it, or fails to act to correct it, they can also incur liability.

Primary Fiduciary Obligations

Plan fiduciaries are bound by duties designed to protect the interests of plan participants and beneficiaries. These obligations are among the highest standards in law.

The duty of loyalty requires fiduciaries to act solely in the best interests of plan participants and beneficiaries. Their exclusive purpose must be to provide benefits and defray only reasonable expenses of plan administration. Fiduciaries must avoid conflicts of interest, ensuring decisions prioritize the plan’s well-being over personal gain or third-party interests.

The duty of prudence requires fiduciaries to discharge their duties with the care, skill, and diligence that a knowledgeable person in a similar capacity would use under comparable circumstances. This standard emphasizes the process of decision-making, requiring thorough research, seeking expert advice when necessary, and making informed choices. Documenting the rationale and process behind decisions demonstrates prudence.

Fiduciaries must diversify investments to minimize the risk of large losses to the plan. This involves spreading investments across various asset classes, industries, and geographical locations. While participant-directed plans like 401(k)s may relieve fiduciaries of liability for individual participant investment choices, fiduciaries remain responsible for selecting and monitoring available investment options.

Fiduciaries must follow the terms of the plan document, provided these terms are consistent with ERISA regulations. The plan document guides the plan’s operations. Any changes to the plan or its operations must align with the document or necessitate a formal amendment.

Fiduciaries must monitor service providers, such as third-party administrators, recordkeepers, and investment managers. This includes regularly evaluating their performance, assessing fees for reasonableness, and ensuring they fulfill their contractual obligations. Monitoring requires continuous review to ensure services remain appropriate and cost-effective for the plan.

Personal Responsibility and Liability

Fiduciaries face personal accountability for breaches of their duties. If a fiduciary fails to adhere to standards, they can be held personally liable to the plan for any losses incurred due to their breach. This liability extends to restoring any profits made through improper use of plan assets.

Consequences of a breach include civil penalties, removal from their fiduciary position, and in some cases, criminal penalties. The Department of Labor (DOL) may assess a civil penalty equal to 20% of the amount recovered for the plan through litigation or settlement. A fiduciary’s own assets could be at risk to cover losses.

While fiduciaries bear responsibility, strategies can mitigate risks. Obtaining fiduciary liability insurance offers protection. Prudent delegation of specific responsibilities to qualified third-party service providers, as permitted by the plan document, can help distribute workload and leverage expertise. However, even with delegation, the delegating fiduciary retains a duty to prudently select and monitor those assigned duties.