Do You Know How Your Pension Plan Really Works?

Knowing Your Fiduciary Responsibilities

The Employee Retirement Income Security Act, known as ERISA, set the standards for operating and managing employee benefit plans. Administering a qualified pension plan falls under this set of standards. As a sponsor of a pension plan, it is your responsibility to protect the interests of your plan participants. Specifically, your fiduciary responsibilities include the following:

• Know and follow your written plan documents: You must understand the terms of your plan, ensure the terms are up-to-date with current laws and regulations under ERISA, and review them for compliance with the Internal Revenue Code (“IRC”). It is your responsibility to avoid prohibited transactions, make timely remittances of participants' contributions, make timely employer contributions to fund benefits, make required disclosures to participants and their beneficiaries, and timely file reports with the Internal Revenue Service (“IRS”) and the U.S. Department of Labor (“DOL”).
• Act prudently: If the plan administrator lacks an expertise, he or she should act prudently and hire an outside expert to perform that particular function. Years ago, many plan sponsors made their own investment decisions. Today, plan sponsors hire outside investment managers and advisers to help select investment options, to monitor investment performance, and to educate plan participants about their investment choices.
• Select and monitor your third-party vendors and administrators: You can outsource certain services provided to the plan, such as payroll accounting, investment management, actuarial services, and plan record keeping, but you can never outsource your ultimate responsibility. It is the plan sponsor's responsibility to make sure outsourced functions are being completed properly and in a timely manner. This requires review, control, and oversight by the plan sponsor. Monitor your service providers carefully after making sure they are qualified to do the job in the first place. It is also your responsibility to make sure any services and expenses paid for by the plan are reasonable.
• Diversify plan investments: Plan assets may consist of a combination of participant-directed and non'participant-directed investment accounts. Plan sponsors should offer a variety of investment choices from which the plan participants can choose to invest their self-funded retirement accounts. A portfolio of diversified investments will include investments that vary based on nature and risk. To limit liability and reduce fiduciary risk, consider bringing in an outside investment adviser periodically to educate participants about the nature and risk of investment options so they can choose options that match their needs and risk tolerance. For non'participant-directed accounts, it is also important to create and follow a prudent investment strategy that reduces and balances risk over time and safeguards investment assets. The main purpose of offering a pension plan is to provide benefits to participants in the future.

Other best practices among plan fiduciaries include the following:

• Create a pension committee from interested and competent individuals at the firm to oversee the operations of the pension plan.
• Document the processes used to meet the plan sponsor's fiduciary responsibilities.
• Document the approval of members of the pension committee and hiring of third-party vendors who are competent.
• If applicable, organize a pension audit committee. Create an audit committee charter that defines the committee's role in hiring the plan auditor and overseeing the pension audit.
• Disseminate information to eligible participants so they can make informed investment decisions.
• Obtain a fidelity bond to meet or exceed the level required by law to protect the plan against any issue that may arise from fraud or dishonesty as covered specifically under the fidelity bond insurance.
• Meet with ERISA counsel to make sure your plan is updated to comply with current laws and regulations.

Following Your Plan Documents