8 Steps to Reduce your Retirement Plan Fiduciary Liability 

8 Steps to Reduce your Retirement Plan Fiduciary Liability

mitigate personal and company fiduciary risks using these 8 practical steps:

1. Draft Plan Policies & Charters

Fiduciaries need written guidelines that assist in decision-making and framing their individual responsibilities; including an Investment Policy Statement (IPS) and a Committee Charter.

A written IPS provides the committee with guidelines for managing plan investments (blueprint/road map). An investment policy should evidence a robust process without being unduly constricting. Policy statements should be neither too restrictive or too vague. If hiring an outside consultant, condition such appointment on adhering to an appropriate investment policy.

A Committee Charter is a formal document used to delegate responsibility from the Named Fiduciary to the appropriate co-fiduciaries. Any delegation to co-fiduciaries must be done via a formal documentation process: Charter, board resolution, sign on & resignation.

2. Purchase Fiduciary Liability Insurance

Fiduciary insurance protects fiduciaries and their personal assets from lawsuits alleging breaches of fiduciary responsibility. Policies cover a plan sponsor's directors, officers and fiduciaries. To receive coverage for ERISA claims, it must be specifically outlined in the policy. Review or purchase a policy that provides broad coverage.

3. Indemnify Fiduciaries

The plan sponsor should offer to indemnify employees who are fiduciaries with respect to fiduciary suits which may arise under ERISA. Examples of permitted indemnification agreements include indemnification of a plan fiduciary by:

  • An employer, any of whose employees are covered by the plan, or an affiliate of such employer, or
  • An employee organization, any of whose members are covered by the plan; and
  • Indemnification by a plan fiduciary of the fiduciary’s employees who actually perform the fiduciary services
4. Practice Procedural Prudence (404a & 404c)

ERISA defines prudence as making the best decision you can based on information that’s readily available to you. Procedural prudence is the process fiduciaries use to make decisions:

  • Identify the issue under consideration
  • Become/hire an expert in this area
  • Determine action in best interest participants
  • Take action and document process & action
  • Review periodically for continued prudence

5. Receive Education and Document Procedures

A Fiduciary is tasked with taking actions in the best interest of their participants. Fiduciaries need to understand the rules, responsibilities, and basis of their decision making. Plan fiduciaries should create and implement an educational fiduciary training program to better understand their responsibilities and obligations under ERISA. Evidence of formal training is often required during a lawsuit.

The most important thing a fiduciary can do is document their procedures. The 3 worst words a fiduciary can utter in a court hearing are "I don't know." Fiduciaries must follow and document written procedures and actions that can demonstrate compliance with ERISA’s fiduciary standards.

6. Hire Consultants: 3(21), 3(38), 3(16) Fiduciaries

Fiduciaries/Trustees may look to hire outside professional trustees, investment managers, co-fiduciaries to help make plan decisions and must carefully and prudently select and monitor any/all co-fiduciaries who are delegated fiduciary responsibilities. Lawyers, consultants and third party administrators might assist their clients with the practical implications of being a fiduciary by: 

  • Helping plan sponsor understand its responsibilities
  • Assisting with hiring a professional trustee or investment manager
  • Recommending the indemnification of certain fiduciaries
  • Recommending the purchase of fiduciary liability insurance
3(21) versus 3(38) versus 3(16) fiduciaries:
  • 3(21) – advice (no discretion)
  • 3(38) – management (discretion)
  • 3(16) – Administrator fiduciary
  • Same standard of care
  • Prudent man standard
  • No higher standard for 3(38)
  • Practical shift of responsibility
  • Likely (but not certain) shift of liability
  • Serve as 3(21) and 3(38) at same time for same client in limited roles

7. Required Distributions

In general, fiduciaries are not liable for any losses due to a participant’s investment choices if they are deemed to be compliant with ERISA §404(c) and regulations promulgated thereunder.

8. Conduct Periodic Audits (Plan & Outsourced Services)

Plan sponsors should conduct periodic self-audits to ensure that their plans are being administered in accordance with ERISA and the Internal Revenue Code. The plan sponsor should be aware of the warning signs that indicate when a self-audit would be appropriate. Such annual financial audits should not be viewed or relied upon as comprehensive compliance audits.


Additional Resources:

Fidelity Fiduciary Learning Center

Fiduciary Best Practices - Assessing Your Risk

401(k) Fiduciary & Plan Administrator Support Calendar

Retirement Plan Compliance Checklist


Who is a fiduciary?

A fiduciary is anyone who exercises discretion authority or management control over a retirement plan; whether it be related to plan design or investments. Fiduciaries exercise discretion/authority over a plan and render advice for a plan. It's important to identify plan fiduciaries and have named fiduciaries on the plan charter since they can be held liable. Fiduciary Liability Insurance will cover any fiduciary named on the plan charter.

Would you advise against including line staff in an investment committee?

Yes, we would advise against including line staff in an investment committee. We typically only see VP or C-Suite level colleagues on the investment committee. 


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