What is a Fiduciary and Why are they Important

A fiduciary is someone who exercises discretionary authority or control over a retirement plan and its assets or provides investment advice to a plan or its participants for a fee. The law governing retirement plans imposes specific duties and obligations on employers and individuals involved with retirement plans, and other entities, including special rules applicable to those falling within the definition of a fiduciary.

Why it is important. 

Fiduciaries are held to a high standard. Not only are plan sponsors held to a prudent expert standard when it comes to operating their retirement plan, fiduciaries can be held personally liable for breaches of their duties. Another reason for concern is the increasing amount of litigation around retirement plans. According to a recent article from Brach and Eichler LLC, from 2019 through mid-2022, more than 200 class action lawsuits were filed against 401(k) plans, fiduciaries, and plan sponsors. Companies spent more than $150 million to settle those lawsuits.¹ Hiring a sound fiduciary can be a smart financial decision.

 

“Meeting fiduciary obligations is largely about having a documented repeatable process for making decisions when it comes to your retirement plan,” said John Randall, a senior retirement plan advisor at 1834.

 

Three keys to managing your fiduciary obligations:

 

1. Understand who is a plan fiduciary: Under federal rules, every plan must have at least one named fiduciary included in the retirement plan document.

There is also a functional fiduciary status, meaning that even if someone is not named as fiduciary within the plan document, they can still be held accountable for taking actions on behalf of the plan. An example of a functional fiduciary is someone that sits on a retirement plan committee or has input with selecting investments or service providers.

2. Know your roles and responsibilities of a fiduciary. According to the U.S. Department of Labor, the primary responsibilities include:

• • Acting solely in the interest of retirement plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.
  • Carrying out duties prudently as someone who is an expert in the field would.
  • Following the retirement plan documents (unless inconsistent with regulations).
  • Diversifying retirement plan investments and assets.
  • Paying only reasonable plan expenses.

 

Additionally, while regulations do not specifically address cybersecurity, if a cyber breach occurs, the plan sponsor or other plan fiduciaries may be liable for a breach of duties.

3. Effective communication is vital in ensuring participants understand their retirement plan and can make informed decisions. Consider:

• • Fiduciaries should provide clear, transparent information about investment options, fees, and any changes to the plan.
  • Regularly educate participants on retirement planning, investment strategies, and the importance of actively managing their accounts.
  • Offering financial literacy resources and tools can empower employees to make better decisions regarding their retirement savings. 

 

Business owners and executives already wear many hats and have limited time. Outsourcing fiduciary duties often makes sense and frees up resources for other projects. Hiring a fiduciary advisor with discretionary authority to select, monitor and replace plan investment options not only mitigates fiduciary risk, but it can also free up time to focus on running the business. It is important to note that the plan sponsor has the responsibility to monitor outside service providers.

 

Fiduciary discussions can be complex, but important. As always, reach out to your 1834 team if you have questions.

 

¹2023 Retirement Plan Litigation Highlights, PlanAdvisor
https://www.planadviser.com/2023-retirement-plan-litigation-highlights/#:~:text=According%20to%20a%20recent%20article,million%20to%20settle%20those%20lawsuits