Author: Taylor Boyd, Burnham Gibson Wealth Adivsors
457 plans are outside the governance of ERISA jurisdiction, but municipal retirement boards and their members should still pay heed to certain areas of this legislation. Retirement boards have a responsibility to act exclusively in the best interest of plan participants. There are several obligations to which a plan’s retirement board must abide. These include duty of loyalty, duty of prudence, and duty to follow plan document. This leads to the question: who is a fiduciary, and what are the appropriate duties of these fiduciaries?
Fiduciaries may be a designee by function or hired out to external parties. It is important to not that one does not have to make decisions to be a fiduciary, and simply having authority to make decisions makes you a fiduciary. Additionally, California government code §53609 states that “Deferred compensation funds are public pension or retirement funds for the purposes of Section 17 of Article XVI of the Constitution.” This means that retirement boards and their members who are responsible for 457 plans are fiduciaries subject to the duties and obligations under Article XVI, §17.
Within the guiding framework of Article XVI §17 of the California Constitution, retirement boards are to act as a “prudent person.” Although ambiguous in nature, the prudent person standard sets forth fair and reasonable boundaries. To gain further guidance and clarity on how to fulfill the prudent person standard, retirement boards should look to ERISA as the barometer for best practices. Fiduciary duties can be broken down to four main categories: duty of loyalty, duty of prudence, duty to diversify and monitor investments, and duty to follow plan document.
- Duty of loyalty
Duty of loyalty is a principle that the directors and officers of a corporation must act without personal conflict of interest when making their decisions as corporate fiduciaries. The board of directors is expected to act solely in the best interest and for the exclusive benefit of the plan participants and spread plan expenses in a reasonable and fair manner.
- Duty of prudence
Duty of prudence requires that retirement boards adhere to the standard of care, skill, prudence, and diligence when fulfilling their fiduciary responsibilities. Plan trustees must create and adhere to a documented process for administration activities. There are certain elements to consider when implementing prudent procedure, and this includes determining what information is needed to make the decision, gathering that information from reputable sources, and giving the information due consideration. Plan trustees should also consult experts as needed before making decisions. All administrative activities and the reasons for making those choices should be documented, especially when decisions are contrary to the expert advice obtained. The best practice to fulfill duty of prudence is to create an Investment Policy Statement and deferred compensation committee.
- Duty to diversify and duty to monitor investments
A duty to diversify requires the board to diversify investments to minimize the risk of large losses. Plan trustees must adhere to 404(c) requirements and develop process to identify, monitor, and replace investments. It is also crucial to be mindful of proprietary funds within investment lineup.
- Duty to follow plan document
One of the most integral parts of meeting fiduciary duties is sticking to the plan document. Under section 402 (a)(1) of ERISA, benefit plans must be established and maintained pursuant to written instruction. Be sure to follow plan document within memorandum of understanding Failure to follow written plan terms amounts to a breach in fiduciary duty with potential repercussions.
Some fiduciaries feel that they are protected if no changes are made at the plan level when in reality, inaction is an action in and of itself. By choosing to not review or investigate their plan, fiduciaries may be failing to meet their fiduciary duties. Many of these 457 plans predate the committee members who govern them, but duty of loyalty must be revisited annually.
A retirement board also needs to have documented plan governance. Plan governance should be a top priority for any retirement board, and should be considered just as important as simply having proper investments within the plan. Establishing an investment or retirement plan committee with clear functions is a pivotal first step in fulfilling fiduciary duties. Forming an investment committee charter and investment policy creates guidelines for adhering to many fiduciary tasks. It is key to have regular committee meetings to ensure plan maintenance does not go neglected, as well as best practices, which includes having documented meeting minutes with clearly outlined follow up items where needed.
I applaud municipalities that offer 457 deferred compensation plans for their employees. While offering a plan comes with countless benefits, it also means that retirement boards must meet their fiduciary duties. The spirit of the law governing 457 plans is always designed to benefit the plan participants. All retirement boards should document plan actions and reviews to ensure fiduciary duties are covered in detail. When navigating the complexities of fiduciary responsibilities, it is best practice for boards to have independent, experienced third parties assist them with adherence to fiduciary guidelines.
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