Understanding a Plan Fiduciary’s Duties

In 1974, the U.S. Congress passed the Employee Retirement Income Security Act (ERISA), which is a federal tax and labor law that sets minimum standards for retirement plans within the industry. It established a standard of conduct for employers (plan sponsors) as plan fiduciaries to act in the best interest of their participants.

Although church plans are not subject to ERISA, church plan sponsors may choose to follow ERISA fiduciary standards as best practice to reduce risk of adverse litigation. Learn more about understanding fiduciary responsibilities, duties and best practices for non-ERISA church plans.

Many activities involved in operating a retirement plan, including a 403(b), may make the person or entity performing those activities a plan fiduciary. As a plan sponsor, it's important for you and other fiduciaries of your plan to fully understand your responsibilities and the consequences of not fulfilling them.

Who is a fiduciary?

With limited exceptions, under ERISA, a fiduciary is anyone who:

• Exercises any discretionary authority or discretionary control over the management of the plan.
• Exercises any authority or control with respect to management or disposition of the plan's assets.
• Has any discretionary authority or discretionary responsibility over the administration of the plan.
• Gives investment advice to the plan for a fee or other direct or indirect compensation or has the authority or responsibility to do so.

Thus, fiduciaries may include, but are not limited to, the plan's trustee, investment manager, administrator, administrative committee and the plan sponsor.

What are a fiduciary's duties?

A plan fiduciary must:

• Follow the plan documents (unless they are inconsistent with regulations or law).
• Act solely in the interests of the plan participants and their beneficiaries for the exclusive purpose of providing benefits to them.
• Act with the care, skill and diligence that a prudent person would exercise under similar circumstances.
• Select and monitor the plan's investments to ensure they are diversified and performing according to standards set by the plan's investment committee.
• Pay only reasonable plan expenses.

Does ERISA prohibit any specific actions by fiduciaries?

Yes, ERISA prohibits certain types of transactions between the plan and specified related parties (called "parties in interest"). As employer/plan sponsor/fiduciary, you are considered a party in interest to the plan. Other parties in interest include employees of the plan, any other fiduciaries (such as the plan's administrator, officer, trustee or custodian), the plan's counsel, plan service providers, a direct or indirect owner of 50% or more of the sponsoring company, and relatives (as defined under ERISA) of 50%-plus owners. Plans that are not subject to ERISA may wish to apply these guidelines to the church plan to avoid any appearance of impropriety.

What transactions are prohibited by ERISA?

Examples of ERISA-prohibited transactions between the plan and a party in interest include selling, exchanging or leasing property; lending money or extending credit; and furnishing goods, services or facilities. The law contains exceptions that protect the plan in conducting necessary transactions that would otherwise be prohibited and for many dealings with financial institutions that are essential for the plan's ongoing operations. For example, a plan can hire a service provider as long as the services are necessary to operate the plan and the contract or arrangement with the provider and the compensation paid for the services are reasonable. And plans may offer loans to participants if certain requirements are met. The ERISA-prohibited transaction rules do not apply to church plans, but state law may hold plans sponsors liable for similar activities.

Are there any other prohibitions?

Fiduciaries also are prohibited from self-dealing. Various restrictions prevent a fiduciary from deriving personal gain from actions that involve the plan. Because of the complexity of the prohibited transaction rules, you should consult your plan's ERISA attorney for advice before engaging in transactions involving plan assets.

What happens if a plan sponsor breaches its fiduciary duty?

Under ERISA, fiduciaries that breach their responsibilities may be personally liable to restore the plan to the condition it was in prior to the breach, including restoring any monetary losses and returning any profits made through the use of plan assets. A fiduciary also may be subject to excise taxes for violating the prohibited transaction rules. Fiduciaries of a church plan may be held responsible under the various state laws.

To further understand fiduciary responsibilities, visit the IRS website.

The general information in this publication is not intended to be nor should it be treated as tax, legal or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction, and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties.