Larry Beebe, CPA

In this series, we are reviewing the written plan policies needed to help your benefit plan stay compliant and operate most effectively. For a full list of the necessary policies and why your plan should implement them, click here.

As a fiduciary of an employee benefit plan, you have an obligation to operate your plan in the best interests of plan participants and their beneficiaries. In order to fulfill this obligation, trustees and other plan fiduciaries must adopt and follow a conflict of interest policy that details the conflicts and prohibited transactions to be avoided. The conflict of interest policy should be followed by plan trustees, plan professionals and by employees of the plan.

Conflict of Interest Policy Considerations

Prohibited transactions can be very serious compliance issues, and this policy is an essential step to helping your plan both avoid them and address them if any should be incurred. Here are the four main components your policy should include:

1. Standards of Conduct. The policy should clearly spell out the acceptable and unacceptable standards of conduct to be followed by trustees, plan employees, plan professionals and other service and products providers. Areas that should be addressed in this section include:

– The definition of a conflict of interest
– Bans against kickbacks and commissions
– Prohibitions of gifts and entertainment
– Warnings against prohibited transactions
– Lists of outside activities allowed and disallowed

2. A Definition of Fraud. Most people understand that the theft of an asset is one form of fraud. What is not often understood, and what the conflict of interest policy should explain, is that fraud also involves a lie or deception that misleads another person. Manipulating the plan’s financial statements is an example of this type of fraud.

3. Notification. The conflict of interest policy should clearly detail who to notify when someone suspects fraud or a conflict of interest. Each individual in the organization should understand that he or she has a responsibility to report irregularities.

4. Consequences. What are the consequences of participating in, covering up or instigating a fraudulent act? The conflict of interest policy should clearly state what happens to an individual who fails to take appropriate action.

An overall goal of having a conflict of interest policy is to have everyone in your organization aware that there is such a policy and the commitment to taking it seriously. For additional information on developing this policy, and on prohibited transactions, please see theTrustee Handbook published by the International Foundation of Employee Benefit Plans.