Updated by Richard Phillips
The Employee Retirement Income Security Act of 1974 (aka ERISA) ushered in a new era of regulations designed to protect participants in an employer-sponsored retirement plan. Most of the tax qualification standards are governed by the IRS and most of the governance protecting participants is found in Title I of ERISA and enforced by the Department of Labor (DOL). Understanding everyone’s role and responsibilities is a must for successful retirement outcomes.
The cornerstone of ERISA enforcement is the establishment of fiduciary standards for plan operations. Fiduciaries carry out most of the responsibilities of the plan. We broadly define a fiduciary as anyone who can exercise discretionary authority over the plan.
The primary categories of responsibilities are:
- Plan Sponsor
- Investment Management
The plan sponsor determines the objectives of the plan. Commonly the employer who adopts the plan is the plan sponsor. and selects service providers (internal and external) who have the expertise and skill to achieve the defined objectives. Commonly the employer who adopts the plan is the plan sponsor.
The plan administrator is the person or organization responsible for the daily and ongoing management of the plan. The plan administrator selects the service providers (internal and external) who have the expertise and skill to achieve the defined objectives of the plan. If the plan administrator elects to outsource administrative and investment management functions, they are still responsible for selecting and monitoring the service providers.
The plan’s trustee establishes the trust account exclusively for providing benefits to the plan’s participants and their beneficiaries. The trustee should objectively determine reasonable fees paid from plan assets. The trustee is usually an individual, but it can be any legal entity domiciled in the U.S. However, legal entities aren’t able to take action on their own so they seldom realize the protection sought.
Trustees may hire an investment adviser to mange the plan’s assets or provide investment advice to participants. Investment advisers are a 3(21) or 3(38) fiduciary adviser. A 3(21) recommends investment options and isn’t responsible for the recommendations. A 3(38) has the authority to select the investment options for the plan. With that authority comes the responsibility, relieving the trustee of the ultimate investment decision.
The record-keeper maintains records and account access for participants. The record-keeper may fulfill other duties to facilitate enrollment in the plan and disseminate required disclosures.
Thir-Party Administrator (TPA)
Employer sponsored retirement plans have preferential tax treatment, so certain qualifications must be met annually to be exempt from current income taxation. The TPA administers the compliance test and prepares the governmental reports.