Understanding Fiduciary Responsibilities – II of III

“Fiduciary Liability” – Part II of III

andrew platou snyder cohn cpa business advisors washington dc maryland virginiaFiduciaries who do not meet their responsibilities may be personally liable. They may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. However, fiduciaries may be able to limit their liability in certain situations. One way that fiduciaries can demonstrate that they have carried out their responsibilities properly is by documenting the processes they used and how decisions were made. Fiduciary liability can also be limited when plans, such as in 401(k) or profit-sharing plans, are set up so that participants have control over the investments in their accounts. The fiduciary remains responsible for selecting and monitoring the providers of the investment options and the options themselves, but not for the participants’ investment decisions. In order for the participants to have control over the investments, participants must be given the opportunity to choose from a broad range of investment alternatives. There must be at least three different investment options so that employees can diversify investments within an investment category, such as through a mutual fund, and diversify among the investment alternatives offered. Participants must be given sufficient information to make informed decisions about the options offered under the plan. Participants also must be allowed to give investment instructions at least once a quarter, and perhaps more often if the investment option is extremely volatile.

A fiduciary can also hire a service provider or providers to handle fiduciary functions and set up the agreement so that the person or entity then assumes liability for those functions selected. If an employer appoints an investment manager that is a bank, insurance company, or registered investment advisor, the employer is responsible for the selection of the manager, but is not liable for the individual investment decisions of that manager. However, an employer is required to monitor the manager periodically to assure that it is handling the plan’s investments prudently.

All fiduciaries have potential liability for the actions of their co-fiduciaries. If a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, both fiduciaries are liable. Therefore, a fiduciary should be aware of others who serve as fiduciaries to the same plan. Those who handle plan funds or other plan property generally must be covered by a fidelity bond. A fidelity bond is a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond.

Fiduciaries also have responsibilities regarding participant contributions. If a plan, such as a 401(k) or 403(b) plan, provides for salary reductions from employees’ paychecks for contribution to the plan, then the employer must deposit the contributions in a timely manner. The law provides a definition of what is timely. It requires that participant contributions be deposited in the plan as soon as they can be reasonably segregated from the general assets of the employer, but no later than the 15th business day of the month after which they were withheld. However, it is very important to note, that if employers can reasonably make the deposits sooner, they are required to do so. In January of 2010 the DOL issued a safe harbor rule applicable to small plans. Those plans will be deemed to comply with the law if contributions are deposited within seven business days after they were withheld.