Bad securities markets leave retirement plan participants questioning the people in charge. Lawsuits are often filed and employers who are fiduciaries are the targets.

Fiduciaries come in two forms: the person who controls the management of a plan or its assets, or a firm who is paid to give investment advice. Individuals can be fiduciaries for limited purposes and perform other, non-fiduciary duties regarding the same retirement plan. Individuals who simply follow directions or guidelines are not considered a fiduciary.

Fiduciaries must be named in the plan’s documents so that plan participants or other interested parties (the IRS) know who is responsible. Employers can designate themselves as a fiduciary, but plan documents should specify a standing committee or the job title of a person who will carry out the fiduciary responsibilities.

Generally, anyone who provides investment advice (Registered Investment Advisors) to employers or plan participants or select securities for a fee is considered a fiduciary. Employers who sponsor plans are fiduciaries because they can fire service providers and select investment managers and/or consultants. Administrators who make plan management decisions are also fiduciaries.

When hiring a fiduciary, consider the following:

1. Qualifications with respect to education, credentials, licensing and registrations, relevant experience.
2. Compensation issues.
3. Services.
4. Frequency of monitoring and reporting performance.
5. Bonding and professional liability insurance coverage.
6. The scope of organizational resources.

Businesses have the responsibility to review a fiduciary’s performance at least annually.

Fiduciary duties include:

• Acting in the exclusive interest of plan participants and control expenses.
• Making decisions that a prudent person familiar with retirement plans would.
• Diversifying investments.
• Preventing co-fiduciaries from committing breaches and rectify the actions of others.
• Holding plan assets within U.S. jurisdiction.
• Bonding in the amount of 10 percent of funds handled up to a $500,000 maximum.
• Acting according to the terms of plan documents unless the documents are in conflict with ERISA.
• Avoiding prohibited transactions.

ERISA permits civil actions to be brought by a participant, beneficiary or other fiduciary against a fiduciary for breach of duty. Fiduciaries are personally liable for any losses to the plan resulting from breach of duty – even if they are unaware of a violation. Fiduciaries can also be held liable for failing to act in the plan’s best interest or failing to take reasonable steps to correct another fiduciary’s breach of duty.

Fiduciaries have a great deal of responsibilities and penalties are severe. Employers must act responsibly when dealing with any retirement plan.

* This article was published in the Small Business News publication in January, 2003.

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Louis P. Stanasolovich, CFP, has been named as one of the best financial advisors in America six times by Worth magazine and has been honored by Medical Economics as one of the best financial advisors in America for doctors four times, and by Mutual Funds magazine two consecutive years. He is CEO, President and founder of Legend Financial Advisors, Inc., a fee-only financial advisory firm with headquarters located in Pittsburgh. Legend provides Wealth Advisory Services including Comprehensive Financial Planning and Investment Management to individuals and businesses.