FAQs: Benefit Plans

1. What is ERISA?

The "Employees Retirement Income Security Act" or ERISA was enacted in 1974 and is the primary tax law governing employee benefit plans - including Qualified Retirement Plans. It has been amended numerous times since its inception. ERISA sets standards of conduct for those who manage an employee benefit plan and its assets (called fiduciaries).

2. What is a "Qualified Retirement Plan"?

A "Qualified Retirement Plan" is one which has met the various IRS (Internal Revenue Code) requirements that qualify it for the favorable tax status afforded a Retirement Plan.

3. What is a fiduciary?

Fiduciary status is based on the functions performed for the plan, not just a person’s title. Anyone who maintains or has control over the plan’s operation is considered a "fiduciary".

A plan must have at least one fiduciary (a person or entity) named in the written plan.

A plan's fiduciaries will ordinarily include the trustee, investment advisers, and all individuals exercising discretion in the administration of the plan. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan.

4. What are the duties of a fiduciary liability?

Fiduciaries have important responsibilities and are subject to certain standards of conduct. These responsibilities include, but are not limited to:

  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
  • Carrying out their duties prudently;
  • Following the plan documents (unless inconsistent with ERISA);
  • Diversifying plan investments; and
  • Paying only reasonable plan expenses.

The duty to act prudently is one of a fiduciary's central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments and plan interpretation. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.

5. Can I eliminate personal fiduciary liability?

With fiduciary responsibilities, there is also potential liability. Fiduciaries that do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.

However, fiduciaries can limit their liability in certain situations. One way fiduciaries can demonstrate that they have carried out their responsibilities properly is by documenting the processes used to carry out their fiduciary responsibilities.

A fiduciary can also hire a service provider or providers to handle fiduciary functions, setting up the agreement so that the person or entity then assumes liability for those functions selected. However, an employer is required to monitor these service providers periodically to assure they are prudently performing the tasks for which they were hired.

6. How should a service provider be hired?

Hiring a service provider in and of itself is a fiduciary function. When considering prospective service providers, provide each of them with complete and identical information about the plan and what services you are looking for so that you can make a meaningful comparison.

You should document your selection and monitoring process.

7. How do I monitor a service provider I have hired?

An employer should establish and follow a formal review process to periodically determine if they want to continue using the current service providers or look for replacements. When monitoring service providers, the following should be considered and/or reviewed:

  • Reviewing the service providers' performance;
  • Reading any reports they provide;
  • Checking actual fees charged;
  • Asking about policies and practices (such as trading, investment turnover, and proxy voting); and
  • Following up on participant complaints.

8. Who pays the fees associated with the plan?

Plan expenses may be paid by the employer, the plan, or both. In addition, expenses paid by the plan may be allocated to participants' accounts. In any case, the plan document should specify how fees are paid and they must be assessed in a non-discriminatory manner.