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Retirement

Do 457 Plans have Fiduciary Duties?

The Baldwin Group
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Updated: September 13, 2024
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4 minute read

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 the 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 note that one does not have to make decisions to be a fiduciary, and simply having authority to make decisions makes you a fiduciary. Additionally, your domicile state may place additional obligations on you and your fiduciaries. 

For example, 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 domiciled in California 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 about how to fulfill the prudent person standard, retirement boards should look to ERISA as the barometer.

Fiduciary duties can be broken down into four main categories: duty of loyalty, duty of prudence, duty to diversify and oversee investments, and duty to follow the plan document.

  1. 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.
  2. 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. One best practice option to fulfill duty of prudence is to create an Investment Policy Statement and deferred compensation committee.
  3. Duty to diversify and duty to oversee investments
    A duty to diversify requires the board to diversify investments to help minimize the risk of large losses. Plan trustees must adhere to 404(c) requirements and develop a due diligence process to identify, and replace investments, as needed. It is also crucial to be mindful of proprietary funds within an investment lineup.
  4. Duty to follow the 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 the plan document within memorandum of understanding agreements. Failure to follow written plan terms may result in 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 conduct regular committee meetings to ensure plan maintenance does not go neglected, this includes having documented meeting minutes with clearly outlined follow up items where needed.

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, boards are encouraged to have independent, experienced third parties assist them with adherence to fiduciary guidelines.

This communication is for informational purposes only and does not purport to be a complete statement of all material facts related to any regulation, company, industry or security mentioned. The information provided while not guaranteed to accuracy or completeness has been obtained from sources believed to be reliable. The opinions expressed reflect our judgment now and are subject to change without notice and may or may not be updated. FSC.2024.58

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