This document provides an overview of ERISA and outlines fiduciary responsibilities for retirement plan sponsors. It explains that ERISA sets minimum standards for private pension plans to protect employees' retirement funds. Plan sponsors have fiduciary duties of loyalty, prudence, and diversification. The document warns that brokers who provide advice while compensated through broker-dealer relationships may have conflicts of interest, since their advice is not fully objective. It emphasizes the importance of acknowledging fiduciary status to properly serve retirement plans.

1. Meeting the Intention of ERISA:
A practical guide to becoming an effective
retirement plan fiduciary.
© 2010 DCM Financial Partners Ltd.

2. Meeting the Intention of ERISA:
A Practical Guide to Becoming an Effective Retirement Plan Fiduciary
Your Role as a Plan Sponsor:
Before the passage of the Employment Retirement Income Security Act of 1974 (ERISA), ordinary people had
few protections under the law regarding the fate of their retirement savings. As with many things subject to
government regulation, the rules governing qualified retirement plans are often complex beyond the everyday
understanding, let alone approval, of most business people.
ERISA considers retirement plan sponsors to be fiduciaries. Knowledge of what a fiduciary is supposed to do
is critical because ERISA holds fiduciaries to the highest legal standard.
Unfortunately, most plan sponsors working on behalf of small businesses are typically unaware of their level of
fiduciary responsibility, and usually lack the resources or expertise to meet ERISA’s legal standards. The
overwhelming majority of plan sponsors cannot correctly identify their retirement plan fiduciaries, or what the
roles of those various fiduciaries truly are. But then, why would they? Small business plan sponsors are often
the owners themselves, or managers within the company with several other responsibilities. Such people are
typically busy enough managing the day to day operations of their business and often can’t afford the luxury of
employing an in-house pension advisor.
For most day-to-day purposes, the lack of dedicated resources and pension plan expertise among most small
business owners is typically not a problem. Until the day it is. Then it becomes a BIG problem.
The current environment makes it important for all plan sponsors, no matter the size of their business, to revisit
their fiduciary practices. Market fluctuations, volatility of plan accounts, the threat of participant lawsuits, and
the ever-changing regulatory landscape make now an ideal time for plan sponsors to actively evaluate their
current practices, and advisor relationships, and see if there are areas where they should tighten things up.
The good news is, ERISA not only permits, but requires fiduciaries to get help when needed.
Helping a client understand what’s on their list of fiduciary obligations, and easing the burden of getting it all
done properly, is a profoundly valuable service, and one that is mostly lacking in today’s marketplace. With
litigation on the rise and sponsors increasingly concerned about fiduciary and administrative compliance, it's
more important than ever for sponsors to find consultants and advisors whose service is based on a foundation
of genuine expertise.
The bad news is that many service providers are unwilling, or if willing technically unable, to accept the
fiduciary responsibility that comes with managing your company’s plan. Most sponsors therefore need more
help than they get from their vendors. In fact, most sponsors need more help than they CAN get from their
current vendors.
In the current environment, being an effective fiduciary can sound like a mysterious or complex (and therefore
overwhelming) proposition. But it doesn't have to be. This paper is intended to demystify what ERISA is and
does, what fiduciary responsibilities plan sponsors have, and what sponsors can do to fulfill their
responsibilities in the "real world."
What ERISA is:
ERISA is a federal law that sets minimum standards for most voluntarily established pension and health plans in
private industry to provide protection for individuals in these plans.

3. ERISA protects the assets of millions of Americans to ensure as far as possible that funds placed in retirement
plans during their working lives will be there when they retire.
ERISA does not require any employer to establish a pension plan. It only requires that those who establish
plans must meet certain minimum standards. The law generally does not specify how much money a participant
must be paid as a benefit.
What ERISA does:
• Requires plans to provide participants with information about the plan, including plan features and funding.
The plan must furnish some information regularly and automatically. Some is available free of charge,
some is not.
• Sets minimum standards for participation, vesting, benefit accrual and funding. The law defines how long a
person may be required to work before becoming eligible to participate in a plan, to accumulate benefits,
and to have a "nonforfeitable" right to those benefits. The law also establishes detailed funding rules that
require plan sponsors to provide adequate funding for the plan.
• Requires accountability of plan fiduciaries. ERISA generally defines a fiduciary as anyone who exercises
discretionary authority or control over a plan's management or assets, including anyone who
provides investment advice to the plan. Fiduciaries who do not follow the principles of conduct may be
held responsible for restoring losses to the plan.
• Gives participants the right to sue for benefits and breaches of fiduciary duty.
• Guarantees payment of certain benefits if a defined plan is terminated, through a federally chartered
corporation, known as the Pension Benefit Guaranty Corporation.
The Employer’s Fiduciary Responsibility:
ERISA protects plan participants by requiring that those persons or entities who exercise discretionary control
or authority over plan management or plan assets, or who have discretionary authority or responsibility for the
administration of a plan, or who provide investment advice to a plan for compensation (or have any authority or
responsibility to do so) are subject to “fiduciary responsibilities.” Plan fiduciaries include, for example, plan
trustees, plan administrators, and members of a plan's investment committee.
The principal Fiduciary Duties are:
1) Loyalty
2) Prudence
3) Diversification
4) Following the governing documents of the plan
The primary responsibility of fiduciaries is to run the plan “solely in the interest of participants and
beneficiaries” and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must
act prudently and must diversify the plan's investments in order to minimize the risk of large losses. In addition,
they must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA. They
also must avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan
that benefit parties related to the plan, such as other fiduciaries, service providers, or the plan sponsor.
Fiduciaries who do not follow these principles of conduct may be personally liable to restore any losses to the
plan, or to restore any profits made through improper use of plan assets. Courts may take whatever action is
appropriate against fiduciaries who breach their duties under ERISA, including their removal.
The scope of who may be a plan fiduciary is wide, and the legal standard to which fiduciaries are held is
extremely high. Fortunately, ERISA encourages plan sponsors to get help in carrying out their fiduciary duties.

4. A Word about Brokers and Conflict of Interest:
Sponsors and participants need help of the kind that only a consultant acting as a fiduciary can give. Any
relationship that fails to give this needed help is incomplete and more likely to result in plan and participant
failure.
Therefore, adequately serving a retirement plan calls for someone in the relationship to act as an acknowledged
competent fiduciary. Sponsors are becoming more aware of their obligations, and often request that their
advisors assist them by embracing some fiduciary responsibility. But not all advisors are equal in their ability
to take on this role.
An "advisor" is someone who gives advice to a client, whether in the form of plan design, what investments can
or should be in the plan, etc. A "broker" is someone who is able to facilitate an investment transaction (e.g. a
purchase of a mutual fund) between the individual buyer, and the seller of the investment. Brokers are usually
compensated by the companies who pay them (called "broker-dealers") to give priority to selling that company's
family of mutual funds (e.g. John Hancock, Fidelity, etc.). The relationship looks like this: Investor-Broker-
Broker Dealer. The money flow looks like this: Investor-Broker Dealer-Broker.
Brokers can act as Advisors, and in fact plan sponsors often choose brokers as their advisors. However brokers
who act as advisors, but who are compensated by a broker dealer, once they recommend certain investments
over others because of the way they are compensated, put themselves in a position of conflict of interest. And
they are subsequently deemed to be embracing an “unacknowledged fiduciary obligation” on behalf of the
client they are trying to serve, even though they may be doing this in good faith.
The bottom line is, if one acts as an advisor, the advice you give is supposed to be objective, and, as far as
you’re able, in the best interests of the client. If a broker knows he will get paid more money by recommending
his broker dealer's fund, as opposed to another fund, the advice he or she is giving is not objective, and therefore
may not always be in the best interests of the client. Plan sponsors are often unaware of this potential conflict.
Broker dealers are aware of this potential conflict, and so they typically do NOT permit their brokers to
contractually accept fiduciary responsibility on behalf of their 401(k) clients. Brokers may feel, however, that in
order to provide a sufficient level of service to their clients, they must often act as de facto fiduciaries in order
to remain competitive in the market. The Dept. of Labor is giving such arrangements more and more scrutiny,
and under proposed legislation this type of "unacknowledged fiduciary" relationship will likely be deemed a
“prohibited transaction,” and will be risky for both the broker and the plan sponsor. The fact that brokers may
enter into a fiduciary relationship that they cannot openly disclose will almost certainly soon be considered
violative of ERISA’s standards of disclosure, pursuant to proposed section 408b-2.
An employer who enters into such an “unacknowledged fiduciary” relationship with a broker, and who engages
in a “prohibited transaction” with that broker, may risk the qualification status of their company’s retirement
plan. In other words, suppose you, as an employer, enter into a relationship with a broker whose contract with
his broker/dealer states that he is not technically permitted to serve you in a fiduciary capacity. The broker may
do this because he realized you need and want that help, and he wants to keep you as a client. However, your
fiduciary relationship with that broker is prohibited, because of his conflict of interest, and in future the plan
may risk disqualification if that fiduciary relationship is maintained.
The safest route for employers, therefore, is to seek advisors who are not compensated differently depending
upon the investment choices of their clients (and/or are independent of a relationship with a broker dealer), in
order to avoid unwittingly entering into such a “prohibited transaction” scenario, and to secure the most
objective advice possible.

5. Enforcement of Plan Provisions:
The U.S. Department of Labor enforces Title I of ERISA, which, in part, establishes participants' rights and
fiduciaries' duties.
The U.S. Department of Labor's Employee Benefits Security Administration (EBSA) is the agency charged
with enforcing the rules governing the conduct of plan managers, investment of plan assets, reporting and
disclosure of plan information, enforcement of the fiduciary provisions of the law, and workers' benefit rights.
Required pension plan disclosure:
ERISA requires plan administrators - the people who run plans - to give participants, in writing, the most
important facts they need to know about the company pension plan. Some of these facts must be provided
regularly and automatically by the plan administrator. Others are available upon request, free of charge or for
copying fees. Participant requests should be made in writing.
One of the most important documents participants are entitled to receive automatically when they become
participants in an ERISA-covered pension plan, or beneficiaries receiving benefits under such a plan, is a
summary of the plan, called the summary plan description or SPD, which outlines what the participant benefits
are and how they are calculated. A copy of the SPD should be available from the employer or pension plan
administrator.
In addition to the SPD, employers may also provide an individual benefit statement showing the value of the
pension benefits that the participant has actually earned to date and their vesting status.
Plan administrators are legally obligated to provide the SPD to all participants, free of charge. The SPD is an
important document that discloses what the plan provides and how it operates. It states when employees began
to participate in the plan, how service and benefits are calculated, when benefits become vested, when
individuals will receive payment and in what form, and how participants may file claims for benefits.
Participants should read their SPD to learn about the particular provisions that apply to them. If a plan is
changed participants must be informed, either through a revised SPD, or in a separate document, called a
summary of material modifications, which also must be provided free of charge.
Also in addition to the SPD, the plan administrator must automatically give to each participant, each year, a
copy of the plan's summary annual report. This is a summary of the annual financial report that most pension
plans must file with the Department of Labor. These reports are filed on government forms called Form 5500
or 5500-C/R. The summary annual report is also provided at no cost. To learn more about plan assets,
individual participants may ask the plan administrator for a copy of the annual report in its entirety.
If participants are unable to get the SPD, the summary annual report, or the annual report from the plan
administrator, they may be able to obtain a copy by writing to:
U.S. Department of Labor
EBSA Public Disclosure Room N-1513 200 Constitution Avenue, NW
Washington, DC 20210
Participants should include their name, address, and telephone number to assist the Employee Benefits and
Security Administration in responding to their request. There may be a nominal copying charge.
If anyone has information that plan assets are being mismanaged or misused, they should send details to the
nearest regional or district office of the U.S. Department of Labor.

6. Being an Effective Fiduciary:
ERISA requires a prudent and deliberative decision making process that is documented and transparent.
There’s nothing in the law that requires you to make a perfect or best decision, merely to show that you fulfilled
a prudent standard in your decision making, formalized your decision making process, and that you are also
able to show that the process was followed.
While lawsuits are becoming more frequent, several federal court cases have found in favor of the plan sponsor,
when the sponsors were able to show that their processes were documented and that decisions were taken in a
deliberative manner.
Reducing Fiduciary Risk:
1) Hold regular committee meetings (calling special ones when necessary). These meetings should
include the advisors that you will need at the table to guide your decision making. Document the
discussion, and any decisions, even if the decision is to do nothing (maintain status quo).
2) Maintain a clear investment policy statement. Both Defined Benefit and Defined Contribution plans
benefit from a having such a statement that can be demonstrated to guide investment decision making
on behalf of the plan. Once the policy is created it is very important that it is followed. Therefore, the
document should be reasonably flexible, in order to embrace shifting opportunities in capital markets.
It should be noted that the investment policy statement is one of the most highly requested items in the
case of an audit by the Department of Labor (DOL).
3) Provide a QDIA alternative. In the case of Defined Contribution plans such as a 401(k), section 404(c)
of ERISA relieves plan sponsors of fiduciary responsibility for participant investment decisions if
certain requirements are met. Plan sponsors still need to choose and monitor prudent investment
vehicles within their investment offerings, but they are relieved from liability for the individual
investment choices participants make. Most participants are not well versed in investment portfolio
management, and with disconcerting frequency may elect not to make any investment decisions at all
with respect to how they allocate their retirement savings. In such a case, plan sponsors should
consider providing a Qualified Default Investment Alternative (QDIA) to the participants in their
plans. The QDIA automatically invests the participant’s money in a prudently diversified allocation of
funds. The QDIA therefore removes the burden of investment decision making from the participant,
while still providing fiduciary relief for the plan sponsor.
4) Provide as much education and advice for participants as possible. ERISA does not require plan
sponsors to offer advice or education to their plan participants, but the best way to demonstrate you
have been an effective fiduciary is to be able to show you did everything you could to offer your
participants the outcome of a financially secure retirement. Offering clear, unbiased education and
advice programs is an important way that you as a plan fiduciary can help your participants achieve
this goal. Fortunately current technology makes it easier than ever to afford plan participants access to
this kind of expertise, if, as is the case in many small businesses, that investment expertise does not
reside in-house.
5) Offer low cost investment options, and review plan expenses periodically. Here again, ERISA does not
stipulate that the lowest cost investment option need always be offered to plan participants. But recent
DOL decisions and opinions continue to indicate an evolution to an expectation of at least higher
transparency regarding expenses. And given the long-term effects of high expenses on a retirement
portfolio, offering lower cost vehicles of relatively equivalent performance will once again
demonstrate that you did everything you could do to optimize your participants’ retirement outcome.
Understanding the fees you are paying (what they really are and how much they really are) is
obviously an important step in deciding upon a “less expensive” option. Hidden fees lurk in the fine
print of many advisor contracts, and in our opinion even openly stated expenses may not be justifiable
over the long term given the level of advisor expertise being put forward.

7. Wrapping it all together:
At the end of the day, the most important thing a plan sponsor can do internally is to ensure that they have a
prudent, deliberative, and effective decision-making process regarding plan management, further that the
decision process is documented in the minutes of regularly conducted meetings, and finally that the process is
actually followed. The sponsor should know who all the relevant fiduciaries are, and who has responsibility for
what, and provide all required disclosure to the relevant parties in a timely manner.
When it comes to external expertise, employers should choose plan administrators who will evaluate their plans
on an ongoing basis, not just once a year, and make adjustments as necessary prior to the end of the plan year.
They should also choose investment advisors who are objective, that is who are not compensated by
recommending or selling one investment vehicle over another, thereby minimizing the risk of entering into a
prohibited transaction that may disqualify their plan.
Sources:
Swisher, Peter, CFP, CPC, 2009: 401(k) Fiduciary Governance: An Advisor’s Guide; 2nd
Ed., ASPPA.
Phillips, Richard, CFP, QPA, QKA, 2010: Personal Conversation; ASPPA Examination and Education Comm.
The Vanguard Group, 2010: Fiduciary Focus (Online Production); Vanguard Marketing Corporation.
Retirement Plans, Benefits and Savings: www.dol.gov: FAQ’s and other sections; US Dept. of Labor