Defined Contribution Plan Fiduciary Responsibility

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Type: 
Best Practice
Background: 

Many governments offer defined contribution (DC) retirement plans as a supplement to a defined benefit plan (DB) or, in some cases, the sole employee retirement plan. DC plans and hybrid plans, which have features of both DB and DC plans, have become increasingly prevalent since 2008.1

DC plan administrative structures vary significantly among governmental entities. However, regardless of the structure, all governing fiduciaries set strategy and policy, determine decision-making authority, and delegate day-to-day management of the plan. Making sure roles and responsibilities are clearly structured and consistently and fairly enforced not only promotes good governance but also provides legal protections for both plan fiduciaries and plan participants. Individuals and groups charged with plan oversight must use prudent management to act exclusively in the best interest of all plan participants and beneficiaries.

Administrators of DC plans have fiduciary duties that can be divided into three categories:2

  1. Duty of loyalty – the obligation to act for the exclusive benefit of the plan participants and beneficiaries. Fiduciaries must put the interest of all plan participants and beneficiaries above their own interests or those of any third parties, including the employer. Fiduciaries do not represent a specific constituency or interest group.
  2. Duty of care – the responsibility to administer the plan efficiently and properly. This includes evaluating the ongoing appropriateness of investment options and ensuring the plan operates in compliance, as well as seeing that the plan operates in compliance with the plan document, trust agreements, and any other rules and guidelines.
  3. Duty of prudence – the obligation to act prudently in exercising power or discretion over the interests that are subject to the fiduciary relationship. A fiduciary should act as a reasonable or prudent person would act in a similar situation or in conducting his or her own affairs.3
Recommendation: 

The Government Finance Officers Association recommends that sponsoring entities provide a clear and well-documented governance structure to guide plan administrators. To provide sound fiduciary guidance, sponsoring entities, governing bodies, and plan administrators should:

  1. Clearly delineate the governance responsibilities of the parties charged with plan administration in the appropriate plan and trust documents. Fiduciaries are responsible for following the terms of the plan documents.
  2. Require fiduciary training for all those who have fiduciary responsibilities. Plan documentation should also include acknowledgement that fiduciaries understand their roles, along with evidence of initial and ongoing fiduciary training.4
  3. Document the decision-making process, keep plan documents current, and ensure that they reflect the substantive plan. Administrative actions and interpretations that accumulate over time should be formally documented and incorporated in any plan summaries and, when appropriate, in the plan document. Doing so will help avoid legal issues regarding variations between the substantive plan and the official plan documents.
  4. Communicate no less than annually with service providers to identify plan objectives, goals, and performance standards.
  5. Provide participants with a summary plan description, a document that describes plan benefits and the plan’s significant features.5 Fiduciaries should also:
    1. Conduct periodic educational sessions to review the summary plan description.
    2. Answer participants’ questions and make participants aware of their rights and responsibilities to direct their investments by providing them with information, investment advice, and education.
    3. Review the summary plan description and other documents carefully to avoid conferring legally binding rights and benefits that the plan sponsor did not intend and that are not included in the official plan documents.
  6. Maintain any information necessary for legal and tax compliance (e.g., labor contracts, Internal Revenue Service determination letters) and in accordance with state and local privacy laws (e.g., participant and beneficiary names; dates such as hire dates; any other information specified in the plan description). Seek qualified professional guidance from the plan record keeper and counsel to ensure that the plan documents reflect current legal and regulatory requirements.
  7. Develop and maintain comprehensive policies and procedures via ongoing review processes. Review the policies at least every three years, and update as needed. The policies should include:
    1. Current plan documents; Internal Revenue Service determination letters, administrative interpretations and decisions; policies, guidelines, and procedures regarding governance, administration, accounting, budgeting, and financial reporting; and legal compliance and reporting documents.
    2. Professional and technical training of fiduciaries and administrative management and staff, particularly in the areas of governance and fiduciary duties and responsibilities; plan compliance and legal issues; and best practices in plan administration and all relevant areas of responsibility.
    3. Due diligence for continued financial stability of the DC service providers.
  8. Implement procedures to control administrative and investment costs: 6
    1. Understand all costs associated with the plan, who bears the burden of the costs, and what services can be contracted by the plan within the parameters of what is allowable.
    2. Periodically review contracted services and investment services to make sure the services being purchased are reasonably priced, including but not limited to plan administrator platform.
    3. Develop comprehensive procedures for evaluating investment options for plan participants that include both qualitative and quantitative factors. The array of plan investment options should provide adequate opportunity for diversification.7
    4. Monitor the plan record keeper at reasonable intervals to evaluate the accuracy and sufficiency of communications to participants, and require periodic reports from the record keeper regarding trends in participant transactions (e.g., new enrollments, investment allocations, types and frequency of distributions). Evaluate performance by periodically reviewing the record keeper’s policies and practices, as well as a sampling of individual transactions. Follow up on participant comments and complaints.

Ensure that the contributions due to the plan are collected, distributed according to participant allocations, and invested in a timely manner according to laws, regulations, and contractual obligations.

Committee: 
Retirement and Benefits Administration
Notes: 
  1. See Defined Contribution Plans in the Public Sector: An Update, Center for State and Local Government Excellence, April 2014.
  2. See GFOA Best Practice, Governance of Public Employee Postretirement Benefits Systems.
  3. A measure contained in section 404(a)(1)(B) of the Employee Retirement Income Security Act (ERISA) that requires the fiduciary of a defined contribution retirement plan to use “care, skill, prudence and diligence,” and to act in the same way that someone “familiar with such matters” would act. The “familiar with such matters” language has been interpreted to mean “expert.” This language creates an important distinction from the earlier prudent person guideline in that it holds fiduciaries to a stricter standard. Public plan administrators should also be aware that ERISA rules provide helpful guidance and best practice, and may actually be binding in certain states. (Fiduciary Responsibility Series, TIAA-CREF.)
  4. TIAA-CREF.
  5. See GFOA Best Practice, Preparing an Effective Summary Plan Description.
  6. For more information, see Meeting Your Fiduciary Responsibilities, United States Department of Labor. (This document provides a number of important tips and information on fiduciary duties. It is intended for plans that are regulated by ERISA, which does not apply to most governmental plans, but public plan laws are modeled after ERISA, and public plan trustees generally look to ERISA for guidance, as it provides a model for best practices.)
  7. For more information, see the following GFOA Best Practices: Monitoring and Disclosure of Fees for Defined Contribution Plans, Asset Allocation for Defined Contribution Plans, and Public Employee Retirement System Investments.
References: 

An Elected Official’s Guide to Public Retirement Plans, Cathie Eitelberg (Chicago: Government Finance Officers Association, 1997).

An Elected Official’s Guide to Defined Benefit and Defined Contribution Retirement Plans, Nicholas Greifer (Chicago: Government Finance Officers Association, 1999).

National Association of State Retirement Administrators (NASRA) Resolution 1999-06 - Code of Ethics.

International City County Management Association Code of Ethics.

GFOA Best Practice, Participant Education Guidance for Defined Contribution Plans

GFOA Best Practice, Public Employee Retirement System Investments.

GFOA Best Practice, Governance of Public Employee Postretirement Benefits Systems.

GFOA Best Practice, Monitoring and Disclosure of Fees for Defined Contribution Plans.

GFOA Best Practice, Asset Allocation for Defined Contribution Plans.

Approved by GFOA's Executive Board: 
September 2015