| Fiduciary Responsibilities | ||||||||||||||||||
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| Overview | ||||||||||||||||||
| Both the tax and labor provisions of the Employee Retirement Income Security Act of 1974 (ERISA) include specific requirements concerning
fiduciary responsibilities. Overall, these responsibilities can be grouped in two
categories: (1) those that are positive in nature (in that they require fiduciaries to
take affirmative action) and (2) those that are negative in nature (in that they prohibit
certain action). The fiduciary requirements included in the tax provisions of ERISA
are largely negative although affirmative fiduciary responsibilities also exist under tax
and general fiduciary laws. The labor provisions of ERISA are much more extensive
and deal with both positive and negative fiduciary responsibilities. The material
that follows discusses fiduciary responsibilities in general, where significant
distinctions in the tax and labor provision of ERISA are noted. The fiduciary provisions of ERISA generally were effective on January 1, 1975. The prohibited transactions provision became effective on June 30, 1984. A person (or corporation) will be considered a fiduciary under the labor provisions of ERISA if that person exercises any discretionary authority or control over the management of the plan, any authority or control over assets held under the plan or the disposition of plan assets, renders investment advice for direct or indirect compensation (or has any authority or responsibility to do so), or has any discretionary authority or responsibility in the administration of the plan. |
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| Fiduciary Duties | ||||||||||||||||||
| A fiduciary is required to discharge all duties solely in the interest of participants and beneficiaries, and for the exclusive purpose of providing plan benefits and defraying reasonable administrative expenses. In addition, a fiduciary is charged with using the care, skill, prudence, and diligence that a prudent person who is familiar with such matters would use under the circumstances then prevailing, a standard that has come to be called the prudent expert rule. A fiduciary also is responsible for diversifying investments so as to minimize the risk of large losses unless it is clearly prudent not to diversify. Finally, the fiduciary must conform with the documents governing the plan and must invest only in assets subject to the jurisdiction of the U.S. courts. | ||||||||||||||||||
| Liability of a Fiduciary | ||||||||||||||||||
| Under the labor provisions of ERISA, a fiduciary will be personally liable for any
breach or violation of responsibilities, and will be liable to restore any profits made
through the use of plan assets. Under the tax provisions, a fiduciary may also be
subject to excise taxes for violation of the prohibited transaction provisions. A fiduciary may also be liable for the violations of a co-fiduciary if the fiduciary knowingly participates in or conceals a violation, has knowledge of a violation, or by the fiduciary's own violation enables the co-fiduciary to commit a violation. However, if a plan uses separate trusts, a trustee of one trust is not responsible as a co-trustee of the other trust. Also, a fiduciary will not be responsible for the acts of a duly appointed investment manager (except to the extent that the fiduciary did not act prudently in selecting or continuing the use of the investment manager). A trustee is also not responsible for following the direction of named fiduciaries in making investment decisions (if the plan so provides). Non-investment activities can be delegated by a fiduciary if the plan so permits and the procedure for doing so is clearly spelled out; however, fiduciaries remain responsible, under the prudent expert rule, for persons delegated those responsibilities. Similarly, they remain responsible for the acts of their agents in performing ministerial duties. Plan provisions that purport to relieve a fiduciary of responsibilities are void and of no effect. However, a plan, employer, union, or other fiduciary may purchase insurance to cover the fiduciary's liability, but if the plan purchases this insurance, the insurer must have subrogation rights against the fiduciary. An employer or union may also agree to indemnify a fiduciary against personal liability (in corporations using individual trustees, we strongly suggest that the Board issues a resolution so stating). |
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| Prohibited Transactions | ||||||||||||||||||
| Both the labor and tax provisions of ERISA prohibit certain transaction between the
plan and parties in interest. A party in interest is defined broadly and includes,
for example, any fiduciary, a person providing services to the plan, any employer or
employee organization whose employees or members are covered by the plan, a direct or
indirect owner of 50% or more of the business interest, a relative of any of the
above, and an employee, officer, director or a person having 10% or more of the
ownership interest in any of the above. The following are prohibited transactions between the plan and a party of interest:
Additionally, a fiduciary cannot deal with assets in his or her own interest or for his or her own account, act in any capacity involving the plan on behalf of anyone having an adverse interest, or receive any consideration for the fiduciary's own personal account from any party dealing with the plan. A number of exemptions to the prohibited transaction rules specifically are provided for, and a provision for applying for additional exemptions also exists. Among the specific exemptions granted are loans to participants (if available in a nondiscriminatory fashion to all participants, if adequately secured, and if the loan bears a reasonable rate of interest), the furnishing of office space and services for reasonable compensation, the providing of ancillary banking services where this is done without interference with the interests of the plan and the plan participants and, in the case of banks and insurance companies, the utilization of their own facilities to fund their own plans. If a qualified plan engages in a prohibited transaction, it generally will not disqualify the plan. However, an excise tax of 5% of the amount involved will be levied. If the situation is not corrected within the time allowed (90 days unless extended by the Internal Revenue Service), a further excise tax of 100% of the amount involved will be levied upon the fiduciary who participated in the prohibited transaction. |
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| Prohibition Against Holding Office | ||||||||||||||||||
| If convicted of certain specified crimes, a person cannot serve as a plan administrator, fiduciary, officer, trustee, custodian, counsel, agent, employee, or consultant for five years after conviction (or the end of imprisonment, if later). This prohibition will not apply if citizenship rights have been restored or if approved by the United States Board of Parole. | ||||||||||||||||||
| Bonding | ||||||||||||||||||
| The bonding provisions of the Welfare and Pension Plan Disclosure Act were transferred
to the fiduciary provision of ERISA. All fiduciaries and persons who handle plan
funds or other plan assets are to be bonded for 10% of the aggregate amount
handled, with a minimum bond of $1,000 and a maximum bond of $500,000. The secretary
of labor may raise the $500,000 maximum. Bonding generally is not required of
corporate trustees or insurance companies with combined capital and surplus of at least $1
million, if the only assets from which benefits are paid are the general assets of the
employer or a union, or if the secretary of labor finds that other bonding arrangements or
the overall financial condition of the plan is adequate to protect participants. Therefore, self-trusteed plans must obtain what is commonly referred to as an ERISA Bond. Alpha & Omega, Inc. can assist in the securing of such coverage. Premiums for such bonds are very inexpensive and are generally quoted for three year periods. |
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Alpha & Omega, Inc. Financial Management
Consultants |
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