ABC's & 123's of a Retirement Plan

Each plan has certain key elements.

These include:

• A written plan that describes the benefit structure and guides day-to-day operations; (formal business plan for monitoring & selecting fund choices)

• A trust fund to hold the plan's assets

• A recordkeeping system to track the flow of monies going to and from the retirement plan; and

• Documents to provide plan information to employees participating in the plan and to the government.

Employers often hire outside professionals (sometimes called

third-party service providers) or, if applicable, use an internal administrative

committee or human resources department to manage

some or all of a plan's day-to-day operations. Indeed, there may be

one or a number of officials with discretion over the plan. These are

the plan's fiduciaries.

Who Is A Fiduciary?

Many of the actions involved in operating a plan make the person

or entity performing them a fiduciary.

Using discretion in administering and managing a plan or controlling the plan's assets makes

that person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person's title.

A plan must have at least one fiduciary (a person or entity) named

in the written plan, or through a process described in the plan, as

having control over the plan's operation.

The named fiduciary can be identified by office or by name.

For some plans, it may be an administrative committee or a company's

board of directors.

A plan's fiduciaries will ordinarily include the trustee, investment

advisers, all individuals exercising discretion in the administration of

the plan, all members of a plan's administrative committee (if it has

such a committee), and those who select committee officials. Attorneys,

accountants, and actuaries generally are not fiduciaries when

acting solely in their professional capacities. The key to determining

whether an individual or an entity is a fiduciary is whether they are

exercising discretion or control over the plan.

A number of decisions are not fiduciary actions but rather are business

decisions made by the employer.

For example, the decisions to establish a plan, to determine

the benefi t package, to include certain features in a plan, to amend a

plan, and to terminate a plan are business decisions. When making

these decisions, an employer is acting on behalf of its business,

not the plan, and, therefore, is not a fiduciary. However, when an employer

(or someone hired by the employer) takes steps to implement

these decisions, that person is acting on behalf of the plan and,

in carrying out these actions, is a fiduciary.

What Is The Significance Of Being A Fiduciary?

Fiduciaries have important responsibilities and are subject to standards

of conduct because they act on behalf of participants in a retirement

plan and their beneficiaries.

These responsibilities include:

• Acting solely in the interest of plan participants and their benefi

ciaries and with the exclusive purpose of providing benefi ts to

them;

• Carrying out their duties prudently;

• Following the plan documents

(unless inconsistent with ERISA);

• Diversifying plan investments; and

• Paying only reasonable plan expenses.

The duty to act prudently is one of a fiduciary's central responsibilities

under ERISA. It requires expertise in a variety of areas,

such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.

Prudence focuses on the process for making fiduciary decisions.

Therefore, it is wise to document decisions and the basis for those

decisions. For instance, in hiring any plan service provider, a fiduciary

may want to survey a number of potential providers, asking

for the same information and providing the same requirements. By

doing so a fiduciary can document the process and make a meaningful

comparison and selection.

Following the terms of the plan document is also an important responsibility.

The document serves as the foundation for plan operations.

Employers will want to be familiar with their plan document,

especially when it is drawn up by a third-party service provider, and

periodically review the document to make sure it remains current.

For example, if a plan official named in the document changes,

the plan document must be updated to reflect that change.

Diversification - another key fiduciary duty - helps to minimize

the risk of large investment losses to the plan. Fiduciaries should

consider each plan investment as part of the plan's entire portfolio.

Once again, fiduciaries will want to document their evaluation and

investment decisions.

Limiting Liability

With these fiduciary responsibilities,

there is also potential liability. Fiduciaries who do not follow the

basic standards of conduct may be personally liable to restore any

losses to the plan, or to restore any profits made through improper use

of the plan's assets resulting from their actions.

However, fiduciaries can limit their liability in certain situations they have carried out their responsibilities properly is by documenting the processes

used to carry out their fiduciary responsibilities.

There are other ways to limit potential liability.

Some plans, such as most 401(k) or profit-sharing plans, can be set up to give

participants control over the investments in their accounts. For participants to have

control, they must be given the opportunity to choose from a broad range of investment

alternatives. Under Labor Department regulations, there must be at least three different

investment options so that employees can diversify investments within an investment

category, such as through a mutual fund, and diversify among the investment alternatives

offered. In addition, participants must be given suffi cient information to make informed

decisions about the options offered under the plan. Participants also must be

allowed to give investment instructions at least once a quarter, and perhaps more often

if the investment option is extremely volatile.

If an employer sets up their plan in this manner,

a fi duciary's liability is limited for the

investment decisions made by participants.

However, a fi duciary retains the responsibility

for selecting the providers of the investment

options and the options themselves

and monitoring their performance.

A fi duciary can also hire a service provider

or providers to handle fi duciary functions,

setting up the agreement so that the person

or entity then assumes liability for those

functions selected. If an employer appoints

an investment manager that is a bank, insurance

company, or registered investment

advisor, the employer is responsible for the

selection of the manager, but is not liable

for the individual investment decisions of

that manager. However, an employer is required

to monitor the manager periodically

to assure that it is handling the plan's investments

prudently.

Other Plan Fiduciaries

A fi duciary should be aware of others who

serve as fi duciaries to the same plan, since

all fi duciaries have potential liability for the

actions of their co-fi duciaries. For example,

if a fi duciary knowingly participates in another

fi duciary's breach of responsibility,

conceals the breach, or does not act to correct

it, that fi duciary is liable as well.

Bonding

As an additional protection for plans, those

who handle plan funds or other plan property

generally must be covered by a fi delity

bond. A fi delity bond is a type of insurance

that protects the plan against loss resulting

from fraudulent or dishonest acts of those

covered by the bond.

How Do These Responsibilities Aff ect

The Operation Of The Plan?

Even if employers hire third-party service

providers or use internal administrative

committees to manage the plan, there are

still certain functions that can make an employer

a fi duciary.

Employee Contributions

If a plan provides for salary reductions from

employees' paychecks for contribution to

the plan (such as in a 401(k) plan), then the

employer must deposit the contributions

in a timely manner. The law requires that

participant contributions be deposited in the

plan as soon as it is reasonably possible to

segregate them from the company's assets,

but no later than the 15th business day of

the month following the payday. If employers

can reasonably make the deposits sooner,

they need to do so.

Hiring A Service Provider

Hiring a service provider in and of itself

is a fi duciary function. When considering

prospective service providers, provide each

of them with complete and identical information

about the plan and what services

you are looking for so that you can make a

meaningful comparison.

Some items a fi duciary needs to consider

when selecting a service provider include:

• Information about the fi rm itself: fi nancial

condition and experience with retirement

plans of similar size and complexity;

• Information about the quality of the fi rm's

services: the identity, experience, and qualifi

cations of professionals who will be handling

the plan's account; any recent litigation

or enforcement action that has been

taken against the fi rm; and the fi rm's experience

or performance record;

• A description of business practices: how

plan assets will be invested if the fi rm will

manage plan investments or how participant

investment directions will be handled;

the proposed fee structure; and whether the

fi rm has fi duciary liability insurance.

An employer should document its selection

(and monitoring) process, and, when

using an internal administrative committee,

should educate committee members on

their roles and responsibilities.

Fees

Fees are just one of several factors fi duciaries

need to consider in deciding on service

providers and plan investments. When the

fees for services are paid out of plan assets,

fi duciaries will want to understand the

fees and expenses charged and the services

provided. While the law does not specify a

permissible level of fees, it does require that

fees charged to a plan be "reasonable." After

careful evaluation during the initial selection,

the plan's fees and expenses should

be monitored to determine whether they

continue to be reasonable.

In comparing estimates from prospective

service providers, ask which services are

covered for the estimated fees and which

are not. Some providers offer a number of

services for one fee, sometimes referred to

as a "bundled" services arrangement. Others

charge separately for individual services.

Compare all services to be provided

with the total cost for each provider. Consider

whether the estimate includes services

you did not specify or want. Remember, all

services have costs.

Some service providers may receive additional

fees from investment vehicles, such

as mutual funds, that may be offered under

an employer's plan. For example, mutual

funds often charge fees to pay brokers and

other salespersons for promoting the fund

and providing other services. There also

may be sales and other related charges for

investments offered by a service provider.

Employers should ask prospective providers

for a detailed explanation of all fees associated

with their investment options.

Who pays the fees? Plan expenses may be

paid by the employer, the plan, or both. In

addition, for expenses paid by the plan, they

may be allocated to participants' accounts

in a variety of ways. (See Resources for further

information). In any case, the plan document

should specify how fees are paid.

Monitoring A Service Provider

An employer should establish and follow a

formal review process at reasonable intervals

to decide if it wants to continue using

the current service providers or look for replacements.

When monitoring service providers,

actions to ensure they are performing

the agreed-upon services include:

• Reviewing the service providers' performance;

• Reading any reports they provide;

• Checking actual fees charged;

• Asking about policies and practices (such

as trading, investment turnover, and proxy

voting); and

• Following up on participant complaints.

Investment Advice & Education

More and more employers are offering participants

help so they can make informed

investment decisions. Employers may decide

to hire an investment adviser offering

specifi c investment advice to participants.

These advisors are fi duciaries and have a responsibility

to the plan participants. On the

other hand, an employer may hire a service

provider to provide general fi nancial and investment

education, interactive investment

materials, and information based on asset

allocation models. As long as the material

is general in nature, providers of investment education are not fiduciaries. However, the decision to select an investment adviser or a provider

offering investment education is a fiduciary action and must be carried out in the same

manner as hiring any plan service provider.

Resources

The U.S. Department of Labor's Employee Benefits Security Administration offers more

information on its Web site and through its publications. The following are available by

contacting EBSA at 1.866.444.EBSA (3272) or on the EBSA Web site.

For Employers

• http://www.dol.gov/ebsa/pdf/rdguide.pdf

• http://www.dol.gov/ebsa/publications/401kplans.html

• http://www.dol.gov/ebsa/publications/undrstndgrtrmnt.html

• http://www.dol.gov/ebsa/pdf/401kfefm.pdf

• http://www.dol.gov/ebsa/publications/SEPPlans.html

• http://www.dol.gov/ebsa/publications/simple.html

• http://www.dol.gov/ebsa/publications/exemption_procedures.html

For Employees

• http://www.dol.gov/ebsa/pdf/savingsfitness.pdf

• http://www.dol.gov/ebsa/publications/wyskapr.html

• http://www.dol.gov/ebsa/publications/10_ways_to_prepare.html

• http://www.dol.gov/ebsa/publications/women.html

Footnotes

1. If a plan is set up through an insurance contract, the contract does not need to be held in

trust. For a complete list of EBSA publications, call toll-free: 1.866.444.EBSA (3272).

John Pemrick Lewis is an Investment Advisory Representative with Walnut Street Securities,

Inc., a Metlife Company. Member FINRA/SIPC. www.walnutstreet.com 518.330.6804.

jplewis@walnutstreet.com.