As a government plan sponsor, you need to be aware of your responsibilities as a fiduciary in order to minimize your exposure to risk and reduce your potential liability. NAGDCA membership can assist you and your staff in better understanding these responsibilities and their implications. Failure to proactively understand and act upon your fiduciary responsibility is a recipe for disaster. On the other hand, you can easily manage your fiduciary responsibility by following the right process.

Who is a Fiduciary?

ERISA defines a fiduciary as a person who:

• Exercises discretionary authority or control over the management of the plan or disposition of plan assets
• Renders investment advice to the plan for compensation (or has the authority to do so)
• Possesses any discretionary authority over the administration of the plan

• The governing body of the plan. Examples of governing bodies with fiduciary responsibility include a city council, board of directors, supervisors, or board of trustees. However, it also may include other employees of the government that possess discretionary authority over the administration of the plan or exercise discretionary authority or control over the management of the plan or disposition of plan assets.
• Plan administrator. A designated person, such as an executive director, state administrative personnel, board, or third party administrator, who exercises discretionary authority in administration of the plan. The key to determining the plan administrator is to base it on function and conduct and not simply on title. Internal support personnel are often overlooked as potential fiduciaries.
• Investment advisors. Individuals who exercise control over the disposition of plan assets such as a defined contribution board or product review committee. An investment advisor can be a fiduciary designated by another fiduciary as an expert to run the selection process (beyond just monitoring investments). Investment advisors may have a limited fiduciary scope.
• Vendors/providers/TPAs. The fiduciary status of any of these organizations depends on whether there is a delegated duty of monitoring, evaluating, or advising on investment options.
• Outside professionals. Professionals such as attorneys, actuaries, advisors, and consultants could be designated as fiduciaries because they often provide advice and recommendations to plan decision makers. Their status should be determined up front and reflected in the service contract.
• Anyone named in the plan document as a fiduciary, even if they do not exercise discretion.

General fiduciary duties are derived from the common law of trusts.

First, fiduciaries have a duty to ensure that all investments (including brokerage options) remain prudent investments in your plan. Assets once placed in the plan no longer belong to the employer, but rather are owned by the trust for the exclusive benefit of the participants and their beneficiaries. A formal investment policy statement should exist that includes long-term strategies and policies. Due diligence must be demonstrated in the selection and evaluation of investment advisors and other operators based on established measures and monitoring procedures. Plan expenses should be managed and reviewed regularly.

Second, a fiduciary must ensure that assets are diversified appropriately to minimize the risk of large losses. Investment advisors should monitor, evaluate and advise the plan on investment decisions. This should be done based on the investment policy established under the plan. There should be full disclosure of any conflicts of interest and all sources of compensation. In addition, defined contribution plans with participant-directed investments must provide the opportunity to exercise control over the investment of assets. Participants should be able to choose from a broad range of investments and have ample ability to change investment options with materially different risk and return characteristics with materially different risk and return characteristics (frequency should be determined based on market volatility and investments offered). It is the fiduciary’s responsibility to ensure participants can obtain sufficient information to make informed investment decisions. This information includes historical returns, fee information and disclosure.

Third, fiduciaries must demonstrate loyalty to plan participants and beneficiaries. The exclusive benefit rule requires a fiduciary to act solely in the interest of plan participants and beneficiaries for the exclusive purpose of providing benefits and that plan expenses are reasonable. There should be sufficient assurances that impartiality and monitoring techniques exist to ensure there are no conflicts of interest.

Finally, fiduciaries must ensure compliance with plan provisions. The plan administrator should be responsible for overall management of the plan, including responsibilities such as providing appropriate education, calculation and payment of benefits, managing plan expenses, assuring plan documents and provider agreements are current, and complying with legal and legislative changes.

Best Practices

Now that you know who could be considered a fiduciary and the associated responsibilities, how do you apply these concepts to the operation of your plan? Here are eight best practices to help reduce your fiduciary risk and liability:

• Review the current state of your plan. Take a fresh look at your current arrangement with your service provider. You should be monitoring your service provider to ensure they are meeting your performance standards and guarantees. Review the performance, reports, complaints and strategies. Look closely at your current provider’s fees to be sure they are reasonable and commensurate with the services rendered and that all expenses are valid. Review the financial condition and experience, and performance record of the provider with plans of similar size and complexity. Review the qualifications of professionals who will be handling your plan account. Make sure there aren’t any litigation or enforcement actions against the provider. Make sure the salary reduction deferrals and loan repayments are being collected and invested into the plan as soon as administratively practical. Benchmark your stable value rate with alternatives being offered by other providers. Determine whether your plan has a simple approach to allow participants to make prudent asset allocation decisions that are cost-effective and customized to the plan’s investments. Ensure that your plan educators are compensated in a manner that is aligned with the best interests of your plan and participants. If you are utilizing multiple providers, is it making your plan cumbersome and costly? Is your plan taking advantage and benefiting from the reimbursements and savings available from product providers? You may need to evaluate alternative arrangements and providers that could better serve your participants’ retirement needs.
• Look at alternative plans. Can you take advantage of an alternative plan with greater scale that might provide better investments and/or lower costs (i.e., municipalities and counties, and universities may be able to join their State 457 plan)? Even if you can’t join your State 457 plan, you may be able to use it as a benchmark for costs and investment choices.
• Identify your plan fiduciaries. Review your plan documents and activities to produce a list of plan fiduciaries. Remember that anyone who exercises or has the power to exercise discretionary control over plan administration or plan assets, or provides investment advice, may be a fiduciary. That could include a city council member or a personnel administrator. Identify and document those individuals whose actions make them fiduciaries, even if they are not formally designated as such. Develop prudent fiduciary procedures and processes based upon fiduciary principles. Be sure that each fiduciary is aware of his or her status and review documents and activities regularly. . Maintain a fidelity bond covering fiduciaries and all persons handling plan assets to protect against personal liability. Provide periodic fiduciary seminars for your committee and board members. Document compliance with your processes and procedures to increase your chances of limiting your fiduciary liability.
• Conduct periodic plan audits and evaluate your plan design. Conduct ongoing audits of your plan to identify and correct any deficiencies. Determine if your plan is being administered appropriately and within the provisions of your plan document. Review your plan design (e.g., eligibility, enrollment, investment options, transaction limitations, asset flow, etc.) to validate its effectiveness to fulfill its primary goal of income replacement for participants and beneficiaries. When was the last competitive bid issued to benchmark your plan design, provider, and investments? If using multiple providers, consider consolidating to simplify your plan design. Make any changes you deem appropriate and document your decisions. Also, stay current on regulatory and legislative changes that might require a change to your plan.
• Review participant communication and education experiences. Communications should provide an unbiased education to help plan participants make well-informed decisions in order to save for retirement. Are your Educators “educating” participants or “selling” to attract assets to expensive investment options? Make sure that your Educators are fully dedicated, encourage employees to join the plan and understand the nuances of your plan. All participant communication should clearly identify plan features and benefits as well as appropriate regulations and required disclosure. Don’t forget to communicate with retirees.
• Update your investment policy statement. If a formal written investment policy statement does not exist today, be sure to create one. Investment policies should establish the framework to identify and define the duties of key players (e.g., the investment committee, board or outside advisors, etc.), document the goals and objectives of the investment options, detail the process and criteria for selecting investment options prudently, and designate responsibility for monitoring fund performance as well as the process for adding or replacing funds. Along with your investment policy statement, you should maintain documentation of its use in administering the plan. Consider alternative plans that could lessen these responsibilities.
• Evaluate fund performance regularly. Make sure you have selected appropriate qualified members for your investment review committee. These fiduciaries must monitor the appropriateness of each investment option, assess the market volatility of investment alternatives, and provide appropriate information to participants and beneficiaries in order for them to make informed decisions and exercise control over their assets. The details and documentation of these ongoing reviews should adhere to and be kept with your investment policy statement. If you offer a stable value investment, benchmark your stable value rate with alternatives being offered by other providers.
• Maintain documents and records. You should keep documentation of your plan governance process, including reviews of investments, contracts and service agreements, compliance reviews, plan audits, participant communications, etc. A copy of any IRS determination letter or private letter ruling approving your plan document should be maintained, if applicable. Make sure the plan trustees have been properly appointed and the plan’s trust agreement is properly executed. Maintain records of all actions and decisions relating to the plan for at least six years. If you utilize multiple providers, consider consolidating to simplify this process.
• Investment advice or managed accounts. Many plans contract with an advisor to be a fiduciary and provide specific investment advice, others have a non-fiduciary provider of general financial and investment education, interactive investment materials and information based on asset allocation models. Either way, selecting an investment provider is a fiduciary action and must be carried out in the same manner as hiring any plan service provider. Use ERISA Section 404(c) as a guide for proper participant disclosure and education. Such programs are a way of minimizing fiduciary risk for the plan sponsor, while increasing the likelihood of successful retirement outcomes for plan participants.
• Prohibited transactions. Fiduciaries must not engage in self-dealing and must avoid conflicts of interest. Certain parties (called parties-in-interest) are prohibited from doing business with the plan, including employers, unions, plan fiduciaries and service providers. Fiduciaries cannot receive money or other consideration from any party doing business with the plan. Unless an exception applies, some of the prohibited transactions include:
  • a sale, exchange or lease between the plan and party in interest,
  • lending money or other credit between plan and party in interest,
  • furnishing goods, services or facilities between plan and party in interest.
• Breaches of fiduciary duty. Plan fiduciaries may be personally liable if found to have breached a fiduciary duty. You may be considered in breach of fiduciary duty if you:
  • enter into self dealing transactions,
  • fail to exercise plan duties in a reasonable manner,
  • fail to diversify the menu of investment options,
  • fail to monitor plan investments to ensure compliance with you investment policy, or
  • engage in a prohibited transaction.

NAGDCA Can Help

NAGDCA’s vision is to be the leading association for defined contribution retirement plans of government employers to advocate opportunities that empower sponsors to preserve and enhance these plans to meet their goal of providing participants with financial security at retirement.

NAGDCA is your partner in retirement plan administration. As a member of NAGDCA, you can enjoy the benefits of ensuring compliance with your fiduciary responsibilities through:

• Legislative updates that apply to government plans
• Sample documents, including plan documents, RFPs, and investment policy statements
• A voice in Washington to ensure the concerns of government plan sponsors are heard
• Access to NAGDCA and other industry surveys
• Trends in government plan and participant behavior
• Webcasts on relevant defined contribution topics
  
   

The DC committee meets quarterly. Response from participants has been excellent and Marin has an over 75% participation of its total workforce, as well as its retirees. The pre-mixed portfolios depending on a participant's level of tolerance takes much of the stress of investing away from individuals. Past returns have been in line with expectations and works in terms of asset allocation much like a defined benefit plan. Ongoing education and training has provided participants both with on-site meetings and online support.