Advising Clients since 1980

Fiduciary Investing

Because the Department of Labor (DOL) and the Internal Revenue Service (IRS) are becoming more proactive in reviewing retirement plans in accordance with the Employee Retirement Income Security Act (ERISA, 1974), it is appropriate to review established general fiduciary standards. A plan fiduciary is any person who exercises authority or control over retirement plan management or administration or over the disposition of plan assets or renders investment advice to the plan for a fee. As a fiduciary, you are subject to standards of responsibility whose origins date back to English common law.

Basic Principles of Fiduciary Oversight

In general, a fiduciary must discharge duties in accordance with ERISA:

  1. Solely in the interest of beneficiaries;

  2. The plan must be formalized in writing and have written investment objectives;

  3. With care skill, prudence and diligence; and

  4. In accordance with the written instrument governing the trust

Written Plans & Investment Objectives

TThe first steps toward compliance with ERISA is to establish a written Investment Policy Statement. The Policy Statement should contain the following points that reflect the objectives and constraints of the plan, including:

  1. Nominal return benchmarks (with consideration of the “real” rate of return);

  2. Definition of “risk”;

  3. Risk tolerance;

  4. Time period for review and evaluation;

  5. Allowable investments and quality standards;

  6. Liquidity requirements;

  7. Asset allocation policy;

  8. Procedure for selecting and dismissing money managers;

  9. Cash flow of the plan; and

  10. Company finances

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Prohibited Transactions
The first steps toward compliance with ERISA is to establish a written Investment Policy Statement. The Policy Statement should contain the following points that reflect the objectives and constraints of the plan, including:

  1. Sale, lease or exchange of property between the plan and fiduciary

  2. Lending of money between plan and fiduciary

  3. Transferring any plan assets to or use of the plan assets by the fiduciary

  4. Acquiring employer securities and real property in excess of 10% of the plan assets

  5. Self-dealing by the fiduciary

  6. Compensation paid to the fiduciary by any party involved in transactions with the plan asset

Liabilities & Penalties
Any fiduciary who breaches ERISA’s fiduciary obligations can be held personally liable for losses caused by the breach of duty. Delegation to prudent experts and prudent oversight of them may be the only defenses a fiduciary can rely upon.

Penalties may be imposed for up to six years after the fiduciary violation or three years after the party bringing the suit had knowledge of the breach. A willful violation can carry personal criminal penalties up to $5,000 ($100,000 for corporations) and up to one year in prison. Civil actions can be initiated by plan participants, beneficiaries, other fiduciaries and the Department of Labor.

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Charles M. Bloom, Registered Principal offers securities and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.

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