Federal pension law requires plan fiduciaries to fulfill their duties to the plan solely in the interest of plan participants and beneficiaries.4 There are four primary responsibilities:
1. Act for the exclusive purpose of providing benefits to plan participants and beneficiaries and defraying reasonable plan administrative expenses5
Plan fiduciaries must avoid acting in their own interest rather than in the best interest of the plan’s participants and beneficiaries. Assets of the plan may be used to pay for plan administration, but the costs must be reasonable.
In addition to evaluating the reasonableness of plan administrative expenses, fiduciaries should consider how the expenses are allocated. For example, it may be appropriate to pay certain expenses, such as a fee for processing a hardship withdrawal, from the account of the affected participant while allocating other expenses, such as plan auditing fees, among all participants’ accounts. The plan document may describe the appropriate method for allocation.6 Note also that certain costs related to the establishment, design, and termination of a plan—so-called “settlor” functions—may not be paid from the plan.7
2. Act prudently with respect to plan assets8
This duty requires expertise in various areas, such as investments. Implicit in the prudence requirement is the need to monitor plan investment options. The ongoing investment review should generally encompass various measures, such as a comparison of recent performance data relative to an appropriate peer group and benchmark indexes and an assessment of any changes to portfolio managers, investment strategy, or fees.
Plan sponsors who don’t have the expertise necessary to carry out investment or other plan-related functions prudently can hire outside parties with professional knowledge to assist them. However, the plan sponsor remains responsible for following a prudent selection process. This generally entails vetting several potential providers, outlining specific requirements, and requesting the same information from each candidate so that a meaningful, objective comparison that considers all relevant factors can be made. The selection process, including the basis for any decisions made, should be documented and the selected provider’s services should be reviewed at reasonable intervals to ensure the provider is performing the agreed-upon services.9
3. Diversify the assets of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so10
Fiduciaries generally should avoid investing a disproportionately large amount of the plan’s assets in a single security or single type of security, unless the investments themselves are adequately diversified (as may be the case with mutual funds, for example).11 Similarly, a participant-directed plan should provide adequate opportunity for participants to diversify their account investments.
Where Section 404(c) compliance is sought, the plan should have a core investment menu consisting of at least three diversified alternatives, each having different risk and return characteristics.12 In addition, participants must be given sufficient information to make informed decisions about the plan’s investment options and be allowed to give investment instructions at least once a quarter, or perhaps more frequently if the investment option is volatile.13
4. Comply with the provisions of the plan14
Because the plan document serves as the foundation for plan operations, plan fiduciaries should be familiar with its terms. It’s also important to review the plan document periodically and to make sure that any amendments necessary to keep it current are made in a timely manner.15