How to manage staff's retirement pay

Question: I act as trustee on the 401(k) plan for my practice. I understand that as the employer, I am considered a "fiduciary." What does this mean to me personally? Has my role changed with the passage of the new Pension Protection Act of 2006?

Answer: According to a White House news release, failure to address issues related to retirement income security for Americans will result in almost 60% of the entire federal budget being allocated to Social Security, Medicare and Medicaid by the year 2030.

To help address this issue, President Bush recently signed the Pension Protection Act of 2006, which marks the most significant changes to pension law in more than 30 years. The most significant issue is the new provision in regard to defined contribution plans -- such as the 401(k) -- to encourage participation.

Before we talk about changes related to defined contribution plans, let's recap the responsibilities for fiduciaries according to the Prudent Investment Practices handbook by the Foundation for Fiduciary Studies.

A fiduciary has responsibility to:

• Determine investment goals and objectives.
• Approve an appropriate asset allocation strategy, or in the case of a 401(k), the asset classes that are represented by the investment options.
• Approve an explicit, written investment policy statement consistent with the goals and objectives.
• Approve appropriate money managers, mutual fund managers or other prudent experts to implement the investment policy, or approve the due diligence process if delegated to an investment adviser.
• Monitor the activities of the overall investment program for compliance with the investment policy, or approve the performance measurement objectives and benchmarks if delegated to an investment adviser.
• Avoid conflicts of interest and prohibited transactions.

Although plan trustees are responsible for selection and monitoring of investment options in the defined contribution plan, the new law gives relief and clarification on automatic enrollment of participants, default investments and investment advice.

Previously, participation in defined contribution plans required an affirmative election by the employee. Starting with plan years beginning in 2008, employers may adopt an automatic enrollment feature as long as it meets certain "opt-out" requirements.

This change is expected to raise participation in 401(k) plans from 66% to 92% of eligible participants, said Dallas Salisburg, CEO of Employee Benefits Research Institute.

Under the old law, fiduciaries were responsible for investing a participant's account if the participant failed to provide investment direction.

Although we are still waiting on specific guidance from the Labor Dept., indications are that balanced, lifestyle/risk-based and target retirement funds may be appropriate default-type investments, assuming that some notice and disclosure requirements exist. This likely will change the practice of using the most conservative investment option as a default.

Finally, for plan years after 2006, the long-standing practice that prohibits firms from both managing investment plans and offering investment advice has been relaxed. Under the new law, plan providers can render investment advice to participants under two exemptions -- computer-based model and compensation-based model.

To qualify for the exemptions, advice cannot favor certain investments offered by the adviser, nor can compensation vary based upon advice given.

The changes in the Pension Protection Act of 2006 are critical in helping Americans change from an employer- or government-reliant retirement system to one of self-reliance. Your role as employer, trustee, and plan sponsor are vital to that process.