Article
The Employee Retirement Income Security Act (“ERISA”) requires employee benefit plan (“EBP”) fiduciaries to act with prudence, but ERISA does not describe activities that meet the prudence standard. A careful examination of the responsibilities that fall in EBP fiduciaries’ hands reveals that four skill sets or disciplines comprise a compliance framework. Continuous monitoring of those disciplines allows fiduciaries to ensure their conformance to ERISA and maintain assurance.
At a minimum, an EBP fiduciary is required to act with the care that would be exerted by a “prudent person” in dealing with the assets of another.(Restatement of Trusts)
How is Prudence Demonstrated?
EBP fiduciaries demonstrate their prudence by the process they use to manage their benefit plans. For example, prudence is not achieved by selecting investment products or investment vendors that merely claim to be prudent choices.
Instead, a fiduciary serving on a retirement plan committee demonstrates prudence by the process through which investment decisions are managed, rather than showing that investment products and techniques were chosen because they are broadly labeled as “prudent“ or because a vendor’s fees are low. The prudence of each decision material to the well-being of a retirement plan’s participants should be evaluated based on the facts and circumstances relevant to the decision being made.
A Prudent Process
The steps, which comprise the framework for such a process, and help keep EBP committees from making ad hoc decisions influenced by emotions, market noise, press-appointed investment gurus, and/or investment product vendors, fall into four categories.
Four disciplines of fiduciary duty
While much attention is given by many committees to the demands of investing their retirement plans’ assets, “investments“ is only one of four major categories of disciplines that are needed in order to conform to ERISA’s prudence duty.
Governance
Simply put, “governance” means the process of decision-making and the process by which decisions are implemented (or not implemented). Proper governance strategy implements systems to monitor and record what is going on. The governance system for an EBP plan is managed by one or more individuals.
Administration
Activities included in this discipline focus on the evaluation of fiduciary practices, support staff, service provider selection and monitoring, training, accurate regulatory filings, interaction with information technology units, defined duties for the plan’s recordkeeper, and security of the plan’s data and physical operations.
Investments
The steps in this discipline outline the elements of an investment decision-making process that includes confirmation that the plan’s investment managers meet or exceed industry best practices, investment managers are selected carefully, and reports are reviewed periodically that address quantitative and qualitative issues,
Controls
The steps in the Controls discipline are designed to help protect a plan’s participants’ assets, while at the same time increasing the efficient handling of the assets. Controls embrace financial, data, and physical premise security. Controls are designed to preempt mistakes or deviations from best practices, detect deviations when they occur, and take corrective action.
In light of the emphasis now placed on proving conformance to ERISA’s prudence standard by precedent-setting lawsuits and the results of enforcement audits by the U.S. Department of Labor, it’s wise to have a yearly attestation of an EBP’s fiduciary practices. The advisor selected for the work should provide none of the services included in the examination.
Roland|Criss conducts fiduciary attestations for ERISA qualified plans.
