Managing fiduciary duties takes commitment.

Fiduciary responsibilities under the Federal Employee Retirement Income Security Act (ERISA) of 1974 must be met to avoid liability, and possibly civil monetary penalties, for any losses that occur as the result of a breach of fiduciary duty. ERISA requires fiduciaries to prepare written investment

The Federal Employee Retirement Income Security Act (ERISA) of 1974 sets minimum standards to ensure that most private-sector employee benefit plans, including pension plans, are established and maintained in a financially sound manner. ERISA establishes fiduciary responsibilities for persons or entities that manage and control the plan's assets or provide the plan with investment advice. Plan fiduciaries include its trustees, administrators, and investment committee members. Plan advisers include brokers, financial planners, and CPAs who provide advice to the plan sponsor.

Healthcare organizations that sponsor a benefit plan for their employees assume fiduciary responsibility for overseeing large pools of assets. Plan sponsors need to understand their personal responsibility and liability under ERISA. Senior financial executives often are named as trustees or have oversight responsibility for the plan. Unknowingly, plan sponsors may violate ERISA or attain fiduciary status. Fiduciaries who do not comply with ERISA's fiduciary responsibilities may be held personally liable for any losses incurred due to a breach of their fiduciary duty and may face civil monetary penalties. It is critical, therefore, that fiduciaries fulfill their responsibilities.

Courts and the Department of Labor judge fiduciaries' activities by the processes followed, not the investment results. The law states that fiduciaries must:

* Prepare written investment policies and document the process used to make investment decisions;

* Diversify portfolio assets regarding specific risk and return objectives of participants/beneficiaries;

* Use professional money managers to make investment decisions;

* Control and account for all investment expenses;

* Monitor the activities of all money managers and service providers; and

* Avoid conflicts of interest and discharge their duties solely in the interest of plan participants and beneficiaries.

Preparing written investment policies. Fiduciaries can meet their obligations only if the organization's investment policy is clearly stated. A well-thought-out, clearly written investment policy will allow fiduciaries to support all future actions relating to plan investments in a manner that is consistent with the policy. An investment policy must include investment objectives that align with the plan's purposes (eg, growth of capital, provide a comfortable retirement), the appropriate level of risk to meet the objectives, and a procedure for selecting and evaluating money managers.

Diversifying assets. Assets normally must be diversified to minimize the risk of large losses. Investment alternatives should be analyzed according to their effect on the portfolio as a whole. In essence, an investment that might be inappropriate on its own might actually reduce risk when added to the overall portfolio. For example, a high-risk stock might be inappropriate by itself, but when it is combined in a portfolio with low-risk investments, such as bonds, the investor's overall risk is reduced. Risk and reward also need to be considered; that is, fiduciaries faced with investments that have equal degrees of risk must not accept the investment with a lower return.

Investments must be consistent with the investment policy. All investment decisions must be documented to show that the plan sponsor made an effort to fulfill its fiduciary responsibility. ERISA Section 404 (c) provides limited protection from fiduciary liability in participant-directed plans. To benefit from this protection, plans must do the following:

* Offer investment alternatives consisting of at least three different investment categories that have substantially different risk and reward factors;

* Provide sufficient information to allow participants to make investment decisions; and

* Allow participants to switch investment funds at least quarterly

Compliance with 404 (c) does not relieve fiduciaries of their responsibility for selecting money managers, choosing asset classes, controlling costs, and monitoring investment activities.

Using professional money managers. Fiduciaries are held to the standard of "prudent expert." Because most fiduciaries are not investment professionals, they need to hire professional money managers to manage plan assets. Fiduciaries can delegate their fiduciary responsibility for plan assets to an investment manager as long as the process for choosing the managers is prudent and the fiduciary continues to monitor the manager's conduct.

Managers must be registered under the Investment Advisors Act of 1940 or be legally exempt and must acknowledge their fiduciary status in writing. Manager selection should not be based solely on the returns achieved for their managed investments. Risk, style consistency, types of clients, operational and administrative issues, and performance compared with peers all should be considered in the selection process.

Controlling investment expenses. Investment expenses include money manager's fees, mutual-fund expense ratios and loads, brokerage commissions, and consultants' fees. A variety of factors can affect these fees, such as the size of the account and the type of assets. Plan fiduciaries are responsible for ensuring that the plan pays reasonable compensation for the services received. Additionally participants should be made aware of the effect that high fees can have on reducing their retirement assets. The amount of the fee will not necessarily affect the plan's performance. Consequently, fees should not be considered by themselves, but as part of the whole plan.

Monitoring money manager's activities. If investment responsibility has been properly delegated, fiduciaries are not liable for the manager's acts and omissions, but they still have oversight responsibility to periodically review the manager's performance. An evaluation process should be specified in the investment policy including grounds for manager termination. Behavior that signals unsatisfactory performance includes consistent underperformance compared with peers or with factors such as properly applied benchmarks or changes in style.

Avoiding conflicts of interest. A plan sponsor should not arrange a transaction between the plan and a party with a financial interest in it (party in interest). Included in the definition of parties in interest are the employer, shareholders, officers, directors, employees, plan fiduciaries, lawyers, and accountants who provide services to the plan. Prohibited transactions include the sale, exchange, or lease of property between a plan and a party in interest; lending money between a plan and a party in interest; furnishing goods, services, or facilities between a plan and a party in interest; and use of plan assets for the benefit of a party in interest.

Compliance with ERISA is the only way healthcare organizations that offer employee benefit plans can protect themselves from almost unlimited personal liability Plan advisers can add substantial value by making employers aware of their fiduciary duties. Knowledge of the law also can help advisers from unknowingly becoming a fiduciary and committing a fiduciary breach themselves.

ABOUT THE AUTHOR

Matthew Tuttle, MBA, is president, The Legacy Group, Stamford, Connecticut.