Understanding Fiduciary Responsibilities Under ERISA

Why Process Matters More Than Outcome

If you sponsor or administer a company retirement plan, you are more than a facilitator—you are a fiduciary. And with that designation comes significant legal and financial responsibility.  

Many plan sponsors are surprised to learn that fiduciary liability is personal, not just corporate. If you exercise any discretion over the plan, whether in selecting investments, choosing service providers, or overseeing plan operations, you can be held personally accountable under the Employee Retirement Income Security Act (ERISA).

While this reality may sound daunting, it doesn’t need to keep you up at night. With a disciplined governance process, clear documentation, and, when appropriate, the support of outside experts, you can manage these responsibilities confidently and mitigate your risks.

What Does It Mean to Be a Fiduciary?

ERISA defines a fiduciary broadly: anyone who has discretionary authority over the management of a retirement plan or its assets. That means a named fiduciary in plan documents, but also any individual—such as a CFO, HR leader, or committee member—who makes decisions that affect the plan.

Fiduciary duties fall into a few well-established categories:

• Duty of Loyalty (Exclusive Benefit Rule): Decisions must be made solely in the interest of plan participants and beneficiaries. Conflicts of interest must be avoided or disclosed, and plan fiduciaries must resist the temptation to prioritize company cost savings or convenience over participant benefit.
• ‍Duty of Care (Prudent Man Rule): Fiduciaries must act with the skill and diligence of a prudent person in similar circumstances. Importantly, this standard recognizes that not every fiduciary is an expert in investments or ERISA law. If you lack expertise, the prudent action is to seek it, by outsourcing to a qualified advisor or consultant.
• ‍Duty to Follow Plan Documents: Fiduciaries must ensure that the plan is administered according to its governing documents. Eligibility, vesting, contribution limits, and distribution rules all must be applied as written.

Together, these duties underscore that ERISA is less concerned with whether every investment decision turns out favorably financially and more concerned with whether fiduciaries follow a prudent, participant-focused process.

Why Process Is the Cornerstone of Compliance

One of the most common misconceptions about fiduciary responsibility is that it’s about results. In reality, ERISA regulators (the Department of Labor and the IRS) evaluate fiduciaries on their processes.

That means a fiduciary won’t be penalized simply because an investment underperformed. What matters is whether the fiduciary followed a thoughtful, documented process to evaluate and select that investment. The same principle applies to fees: you are not required to choose the lowest-cost provider, but you must regularly benchmark costs and demonstrate that they are reasonable.

Without a governance process, fiduciaries are exposed. Unfortunately, many plans still operate informally, relying on brokerage-style arrangements from yesteryear where ongoing oversight is limited. In our experience, it’s extremely common to see plan sponsors without a committee, without documentation, and without an established framework for making decisions. This is where fiduciary risk becomes acute.

Building a Governance Framework

To meet fiduciary obligations and minimize risk, we advise plan sponsors to establish and document a governance structure built around these elements:

Retirement Plan Committee

Forming a dedicated committee demonstrates that fiduciary oversight is being taken seriously. Committee members should be formally appointed, and their roles clearly defined.

Committee Charter and Meeting Minutes

The committee should operate under a written charter outlining its responsibilities and processes. Regular meetings should be held, and minutes should be kept to document discussions and decisions. These records become invaluable evidence that fiduciaries are acting prudently.

Investment Policy Statement (IPS)

An IPS sets guidelines for managing plan investments, including criteria for selecting, monitoring, and replacing funds. It should be reviewed annually to ensure it reflects current goals and conditions.

Regular Reviews and Benchmarking

At least every one to three years, fiduciaries should benchmark plan fees and investment performance against industry norms.  We believe that investment performance should be compared/analyzed quarterly; plan fees should be benchmarked and discussed at the committee level at least annually; affiliated service providers (both services and fees) should be benchmarked every one to three years. Again, the obligation is not to choose the cheapest or best-performing option, but to prove that decisions are informed and reasonable.

Plan Document Compliance Checks

Because ERISA emphasizes adherence to plan documents, fiduciaries should periodically audit operations against the plan’s provisions. This includes confirming that contributions, distributions, and eligibility rules are being administered correctly.

Outsourcing Expertise When Appropriate

If internal staff lack the necessary expertise, fiduciaries are expected to hire qualified advisors. Many small and mid-sized employers fall into this category. In fact, ERISA guidance explicitly notes that outsourcing can be the prudent course of action in many cases.

Common Oversights and Unwelcome Outcomes

Failure to implement these steps can expose fiduciaries to serious consequences. The risks range from nuisance-level penalties to major disruptions:

• Audits and Investigations: Every plan must file Form 5500 annually, and this filing alone can trigger a random DOL or IRS audit. Without documentation of prudent processes, even minor oversights can result in fines and penalties.
• ‍Lawsuits: All it takes is a single disgruntled participant to spark litigation. TV ads targeting retirement plan mismanagement are increasingly common, and class-action suits can drain company resources, regardless of outcome.
• ‍Plan Disqualification: In the most severe cases, a plan can lose its tax-qualified status, with devastating consequences for both the company and employees.

The good news is that regulators often allow voluntary correction of mistakes before imposing penalties. But this leniency assumes fiduciaries are monitoring their plans, identifying issues, and taking proactive steps to correct them.

The Case for Independent Fiduciary Consultants

Given the complexity of ERISA and the personal liability at stake, working with an independent fiduciary consultant can be invaluable. Independent consultants provide objective guidance without the conflicts of interest that can arise when providers sell proprietary investment products.

At LoVasco, we view one of our most important roles as insulating clients from fiduciary risk. By establishing governance processes, leading committee meetings, documenting decisions, and benchmarking costs and performance, we help plan sponsors demonstrate compliance and fulfill their obligations with confidence.

Prudence, Not Perfection

Being a fiduciary is not about perfection; it’s about prudence. ERISA’s emphasis on process over outcome means that by building a disciplined governance framework, documenting decisions, and seeking outside expertise when necessary, you can fulfill your obligations and protect both your employees’ retirement savings and your own liability.

The risks of neglect are too great, but the solutions are straightforward. An ounce of prevention truly is worth a pound of cure.

Curious if you are getting the fiduciary guidance you deserve? Take our free assessment to discover your results. It’s a quick way to uncover potential gaps…or to confirm that your plan is on solid footing.