Fiduciary Responsibilities In 401(k) Plans
401(k) fiduciaries face responsibilities and risks when offering a 401(k) plan to participants. Smart financial advisors and plan fiduciaries can ease plan adoption—and create a stronger overall plan—by leveraging the tools and products available to simplify fiduciary responsibility and mitigate risk.

ONCE A COMPANY has made a decision to offer a 401(k) plan, the principals need to understand their fiduciary responsibilities as outlined under the Employee Retirement Income Security Act of 1974 (“ERISA”), the federal law that controls the management and operation of plans.

Under ERISA, responsibility as a fiduciary extends beyond the operational functions of simply offering the plan. Fiduciaries should make decisions based on keeping the interests of the plan’s participants and beneficiaries paramount throughout the life of the plan.

The uninformed or poorly trained fiduciary will see ERISA as an ominous collection of unclear rules and murky regulations that only serve to confuse those managing the 401(k) plan. In reality, ERISA should be considered as a guide for all who are involved with plan decisions—and one that will help them make the plan more efficient and stronger for everyone.

Financial Advisors should help guide their clients to embrace the clear direction that ERISA provides, and also advise that they seek professional legal and tax advice to assist them in carrying out fiduciary responsibilities.

General Plan Fiduciary Responsibilities
Plan fiduciaries must ensure that their plan has certain key elements, including:

 

• A written plan document that describes the benefit structure and guides
  day-to-day operations
• A trust fund to hold the plan’s assets, unless all funds are held in insurance
  company contracts
• Investments, or in the case of participant-directed plans, investment options
  from which participants may select to invest their participant accounts
• A recordkeeping system to track the flow of monies going to and from the
  retirement plan and maintain required participant records
• Documents to provide plan information to employees participating in the plan
  and to the government. One or more plan fiduciaries are responsible for the ongoing management and administration of the plan and to supervise these plan requirements

Becoming A “Prudent Expert”

All fiduciaries are held to a high standard of performance when operating on behalf of the plan for the benefit of the plan participants and beneficiaries. The standard is that of a “prudent expert” meaning the care, skill and diligence under the circumstances of a person acting in a similar capacity who is familiar with the investment or other matters involved. Fiduciaries who are deficient in their knowledge of investments, education or administration should hire competent professionals for the purpose of delivering a higher standard of care to the plan participants.

If a plan fiduciary hires one or more individuals or organizations with the intent of delivering services to the plan, then the plan fiduciary must exercise prudence when selecting, monitoring, or evaluating all service providers.

The U.S. Department of Labor and courts typically judge whether plan fiduciaries have acted prudently based on whether the fiduciary has engaged in a “prudent process” by seeking out relevant information, consulting experts when appropriate, considering possible alternatives, and selecting an appropriate course of action based on this process.

Following this type of prudent process and documenting activities as a fiduciary is one of the very best protections available to demonstrate that you have performed in a prudent manner. Clear documentation of the specific duties which have been delegated to plan service provides also will serve as a baseline-reference for fiduciary monitoring and measurement of those services.

Managing Fiduciary Risk

Fiduciary responsibilities are important and involve significant amounts of dollars, entailing fiduciary risk. Fortunately, there are numerous ways for 401(k) plan fiduciaries to manage this risk:

Documentation of Prudent Processes
The U.S. Department of Labor and courts typically judge whether plan fiduciaries have acted prudently based on whether the fiduciary has engaged in a “prudent process” by seeking out relevant information, consulting experts when appropriate, considering possible alternatives, and selecting an appropriate course of action based on this process. Evidence of this process should be documented.

Investment Policy Statement
The Investment Policy Statement is an example of prudent process because it documents the basis for decision making about plan investment matters. The purpose is to outline in a formal manner how the plan investment decisions are made and how the fiduciaries monitor investments on a regular schedule. Performance standards are established, and acceptable tolerances or variations from the benchmark are defined within the document.

ERISA Section 404(c)
In the case of participant-directed plans, complying with ERISA Section 404(c) and U.S. Department of Labor regulations under ERISA Section 404(c) is voluntary. Complying with these regulations, however, may protect plan fiduciaries from responsibility for losses that are a direct result of participant investment directions.

Risk Management Products
Fiduciaries should be familiar with two risk management products that are used in concert with ERISA-covered plans:

        I.      Fidelity Bond
A Fidelity Bond is required by ERISA. This bond protects plan assets and the 401(k) plan participants and their beneficiaries from losses in the plan due to fraud, theft or embezzlement.

     II.      Fiduciary Liability Insurance
This coverage protects 401(k) plan fiduciaries and trustees for breaches of fiduciary duties and the associated losses. This insurance is not required by ERISA but it is recommended. This insurance is not the same as a Fidelity Bond or as corporate Directors & Officers or Errors & Omissions coverage.

Fiduciary Indemnification
ERISA does not allow plans to indemnify fiduciaries if they breach their fiduciary duties, although a company that sponsors a plan generally may indemnify any fiduciary against costs, damages, expenses and liabilities reasonably incurred or imposed in connection with claims against the fiduciary in connection with his or her position as a fiduciary.

Additional Resources

For additional resources on meeting fiduciary responsibilities, you may wish to visit the U.S. Department of Labor’s website at http://www.dol.gov/ebsa/compliance_assistance.html, which includes information for plan sponsors and fiduciaries, including a booklet called, Meeting Your Fiduciary Responsibilities.

AIG SunAmerica Polaris401(k) has created a guide, “Sponsoring a 401(k) Plan: A Guidebook To Understanding Your Fiduciary Responsibilities” which contains extensive information on responsibilities, risk management, fiduciary tools, common mistakes to avoid, and includes a model Investment Policy Statement that is a framework for establishing prudent process. The guide comes with a set of preconfigured file tabs to help you keep organized and on schedule. To get your copy, and for more information about Polaris401(k), please contact your Polaris401(k) Financial Advisor or the Polaris401(k) Help Desk at 1-877-814-401k.

Note: This material is intended to be of a general education nature. It is not intended to be a comprehensive review of the fiduciary responsibilities as defined under ERISA. AIG SunAmerica is not in a position to provide you with tax and/or legal advice. You are strongly advised to consult with your Legal Counsel regarding any of these specific issues.

A prospectus for the underlying investment options is available by calling 877-814-401k. The prospectus contains the investment objectives, risks, fees, charges, expenses and other information regarding the underlying investment options, which should be considered carefully before investing. Please read the prospectus carefully before investing. The unallocated group variable annuity funding Polaris401(k) is an unregistered product without a contract prospectus.

This material does not constitute an offer to sell. Participation in the Polaris401(k) plan is contingent upon the applicant satisfying minimum plan standards and qualifications. The group variable annuity funding Polaris401(k) is issued by AIG SunAmerica Life Assurance Company in Delaware. The product is not available in the state of New York. AIG SunAmerica Life is a subsidiary of AIG Retirement Services, Inc. and a member of the American International Group, Inc. (AIG) family of financial services companies. Investment involves financial risk, including possible loss of principal. Investment return and principal value will fluctuate. The contract and/ or participant’s account value, when redeemed, may be worth more or less than the original investment. The provisions of the plan may differ from the contract. Should such differences occur, the plan provisions will take precedence. Form: AN-940 (9/99). Distributed by AIG SunAmerica Capital Services, Inc. 21650 Oxnard Street, Woodland Hills, CA 91367, 1 (800) 445-7862.

Polaris® and SunAmerica® are registered trademarks of American International Group, Inc.

© 2008 American International Group, Inc. All rights reserved.
 

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