ADVISER QUESTION: I am a fiduciary adviser to a 401(k)
plan. The owner of the plan sponsor, who is the primary fiduciary for the plan,
instructed me that when I talk to terminating participants about their options,
I should only discuss rollovers to individual retirement accounts (IRAs). He
doesn’t want their money in the plan, because he doesn’t want to be a fiduciary
for people who don’t work for him. Is that a problem?
ANSWER: That is a difficult situation ... and one that will
test your mettle.
Let us explain. As fiduciaries to the plan, both you and the
other fiduciaries have a duty of loyalty that runs directly to the
participants. In other words, your legal duty of loyalty is not to the plan
sponsor, even in its fiduciary capacity. Instead, your duty of loyalty is to
the participants. To be more precise, Section 404(a)(1) of the Employee
Retirement Income Security Act (ERISA) says: “A fiduciary shall discharge his
duties with respect to a plan solely in the interest of the participants and
That’s the nature of being a fiduciary, but it is often
misunderstood. To make matters even worse, the plan sponsor has the power to
hire and fire you as a fiduciary for the plan if you don’t follow the company’s
instructions. So, as they say, you are between a rock and a hard place.
Nonetheless, as a fiduciary, you are legally obligated to
act in the best interest of the participants. It seems commonly accepted that,
in order to educate or advise them about distributions, you need to discuss
four scenarios—as well as the major advantages and disadvantages of each—in a
relatively thorough and unbiased way. Those are:
- Keeping their money in the current plan;
- Transferring the money to the plan of a successor
employer, if there will be one;
- Rolling the money over to an IRA; and
- Taking a taxable distribution.
Both the Government Accountability Office (GAO) and FINRA
have said that those four alternatives should be considered, and FINRA has
indicated that the advantages and disadvantages of each alternative should be
taken into account in making a suitable recommendation. Since the common view
is that the suitability standard is lower than the fiduciary standard,
fiduciary advisers who consult with participants should, at the least, discuss
those four alternatives with the participant. Then, the recommendation made by
the adviser should be one in the best interest of that particular individual.
This overrides any duty the fiduciary adviser may have to the plan sponsor.
Of course, there is no requirement that retirement plan
advisers work with participants on distribution issues. If distributions aren’t
one of the adviser’s duties under its agreement with the plan, and if the
adviser avoids those conversations, as some do, then there is no duty to
provide the participants with any information about distributions and
However, if the adviser knows that the plan sponsor is
giving information to participants that misleads them, there is a potential for
co-fiduciary liability. Once the adviser knows that another fiduciary—such as
the plan sponsor—is violating its duties to participants, then the adviser has
a duty to take steps to protect participants ... up to and including reporting
the plan sponsor to the Department of Labor (DOL). The failure to do so is a
fiduciary breach in its own right.
In other words, it’s a mess! You should meet with the owner
and discuss these issues. Make sure that the company’s owner is educated about
his fiduciary responsibilities and fulfills them. If the owner balks at that
and instead instructs you to provide partial or incorrect information to
participants about their distribution and rollover alternatives, you should
consult with an ERISA attorney about your potential co-fiduciary liabilities
One last question about distributions: Why is the duty of
loyalty to participants not better understood? We believe it is because
fiduciary duty runs contrary to most relationships. For example, in most cases,
people have a duty to the person who hired them. With ERISA, even though the
adviser is hired by the plan sponsor or plan committee, the adviser’s primary
duty is to the participants.
Fred Reish is chair of the Financial Services ERISA
practice at the law firm Drinker, Biddle & Reath LLP. A nationally
recognized expert in employee benefits law, Fred has written four books and
many articles on the Employee Retirement Income Security Act (ERISA), Internal
Revenue Service (IRS) and Department of Labor (DOL) audits, as well as pension
plan disputes. Joan Neri, who has been associated with the firm since
1988, is counsel on the Employee Benefits and Executive Compensation Practice
Group. Her practice focuses on all aspects of employee benefits counseling.