Current Thinking

Credit Unions: Make Sure You Know Your Fiduciary

A blog by Richard Rausser, CPC, QPA, QKA, Senior Vice President – July 29, 2014

The 401(k) savings plan has been a godsend for employers and employees alike. It has also been a boon to a seemingly endless universe of companies that offer such plans … plans that do not necessarily cater to a plan sponsor’s every need. One size does not fit all in this space, as many credit unions and other financial institutions have learned to their dismay.

Plan sponsors always want to have in place a service provider that takes responsibility for its plan participants – including fiduciary responsibility. On more than one occasion I have heard horror stories from credit unions who thought they were covered in this area, only to discover that their provider actually has no real fiduciary responsibility – and therefore no accountability. When such a situation arises, oftentimes it is the credit union’s board of directors and/or other executives to whom the moral and legal accountabilities fall.

That is something you probably do not want.

For the past few years, plan sponsors increasingly have been turning to Multiple Employer Plans (MEPs) to alleviate these concerns. A MEP relieves the employer of full fiduciary responsibility – an area where a given credit union may not have the necessary expertise; shifts administrative duties to the provider; and benefits both the employer and its plan participants by furnishing them with the leveraged buying power of a large plan rather than relying on a Single Employer Plan, which of course is smaller.

There are two types of MEPs: The “closed” and the “open.” A closed MEP is comprised of a group of employers who are part of the same industry, business group or trade association – a collection of accountants, a chamber of commerce, or an association like NAFCU. An open MEP is one whose members do not share a commonality of business or association with each other.

Open MEPs have been the subject of much debate since 2012, when the Department of Labor issued “guidance” on them. For a more in-depth look on open MEPs, please click here

The waters may be further muddied by a service provider who does not clearly define the fiduciary duties it is responsible for. Are you working under a 3(16) or a 3(38) – and what do those terms even mean?
Under the terms of the Employee Retirement Income Security Act (ERISA) of 1974, a 3(16) fiduciary acts as the sole plan administrator, and therefore is responsible for managing the plan’s day-to-day operations. A 3(38) fiduciary can only be a bank, insurance company, or registered investment adviser; here the plan sponsor hands over authority to the 3(38) fiduciary to make its investment decisions. There are other types as well.

In addition, credit unions offering a 401(k) program to 100 employees or more must conduct an independent audit (usually on an annual basis), the cost of which can be significant – and usually is at least partly passed on to the credit union. But a reputable firm, equally at ease with credit union 401(k)s of under and over 100 participants, can ameliorate those costs, effectively taking those auditing costs off of your plate.

Professional independent fiduciaries are experts at understanding and explaining how the various fiduciary responsibilities work together on a day-to-day basis. As such, their responsibilities lie well beyond simply discussing (or, worse, skimming over) the different offerings available, and how one may be preferable to another for your credit union.

Having an accountable third-party to maintain those fiduciary responsibilities, and to constantly act in the best interest of a plan’s participants, is key to any plan’s ultimate success. Only by knowing your fiduciary – and only by consulting with a professional, time-tested provider — can you attain the ease of mind you seek.