Nuts & Bolts: Fiduciary Basics

The Employee Retirement Income Security Act of 1974 (ERISA), according to the Department of Labor, protects a “plan’s assets by requiring that those persons or entities who exercise discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so are subject to fiduciary responsibilities.”

It’s important, of course, for plan sponsors and those working on a plan’s retirement committee to be considered fiduciaries to the plan. But if you are a retirement plan adviser, new or seasoned, you are often characterized as a fiduciary as well. In fact, as the plan advisement space has evolved, it’s more common for advisers to  oversee plans as a 3(38) adviser, responsible for managing the investment portfolio of a plan, or as a 3(21) adviser, responsible as a co-fiduciary advising the committee on its investment decisions.

Below, PLANADVISER turns to experts to answer common questions on what it means to be a fiduciary—for advisers and for their clients.

1) What does it mean to be a plan fiduciary?

ERISA prescribes specific duties to those acting in a fiduciary capacity to employee benefit plans, according to Heather Ryan, an employee benefits and executive compensation lawyer and chair of the employee benefits and executive compensation practice group at Robinson Bradshaw.

Ryan says it is “critical” that plan sponsors and their advisers understand when they are acting in a fiduciary capacity and how to carry out those duties. Fiduciary duties, as laid out by the DOL, are:

• Acting solely in the interest of the participants and their beneficiaries;
• Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
• Carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters;
• Following the plan documents; and
• Diversifying plan investments.

Generally, the duty of loyalty means fiduciaries must carry out their responsibilities solely in the best interests of and for the exclusive purpose of providing benefits to plan participants and beneficiaries. According to Ryan, when acting in a fiduciary capacity, plan sponsors and advisers should not consider what may be beneficial to the company or to a specific shareholder.

Further, the duty of prudence requires fiduciaries to act with the skill, care and diligence with which a prudent person, well-versed in the matters at hand, would exercise under the circumstances.

“Basically, fiduciaries need to have the requisite skill and ability to “dig in” that a person who lives in the particular space would have,” she says. “And if, as fiduciary, you don’t have that requisite skill, you have to obtain it. That could be, for example, calling in an adviser or investment managers who have more investment experience to help better inform the fiduciary decision-making process.”

Next, Ryan explains that in the duty to diversify in the investment context of plans, fiduciaries need to offer a range of investment options designed to help participants meet their retirement investment needs while minimizing the risk of large losses.

“In designing an appropriate investment lineup in a 401(k) plan, for example, you should have a variety of different asset classes available so that participants can select from among those options to grow their retirement savings while minimizing this risk of large losses in the case of a particular fund performance issue or a market disruption.”

Finally, fiduciaries are required to follow the terms of the plan documents, even if they personally think a result should be different for a particular individual or situation, Ryan says. Fiduciaries are limited to what the plan provides (assuming the plan complies with applicable law) and need to make sure they understand its terms and conditions.

2) What do I need to know about the fiduciary duties as a retirement plan adviser?

Lisa Van Fleet, a partner in Bryan Cave Leighton Paisner, says advisers should know that they have personal liability for breaches of fiduciary obligations. If they are serving in a fiduciary capacity, they have personal liability for joint and several liability exposures, meaning they could be held financially responsible for the actions of their current fiduciaries.

 As Ryan wrote in a white paper for Robinson Bradshaw, “If fiduciaries fail to fulfill their fiduciary duties, the penalties may be severe. From a financial standpoint, the DOL and IRS may impose civil penalties and excise taxes, and plan fiduciaries may personally face civil lawsuits and criminal penalties. From a human standpoint, plan participants could fear for the security of their plan benefits and lose trust in their employer. In this way, plan fiduciaries safeguard legal compliance, financial health, employer reputation and employee relations.”

3) How do fiduciary duties relate to my clients and business?

Fleet says customers will not retain an adviser unless they are willing to want to acknowledge their fiduciary status, assure them that that they will comply with all fiduciary obligations and have the resources—whether liability insurance or other vehicles—to compensate if a fiduciary breach does occur.

“Those are the practical reasons,” she says. “If you want to go more ‘warm and fuzzy,’ a plan sponsor wants somebody who’s willing to say, ‘I will act in the best interest of your participants, not in my interest. I am willing to acknowledge and assume all that that entails in terms of my duties and my exposure.’”

In other words, the advisers are a partner to the plan sponsor, because they share the common interest of protecting the participants’ funds and assuming the mantle of a fiduciary.

The DOL noted areas a plan sponsor should consider in terms of their providers. It may be helpful, then, to consider how your advisory practice would meet up against these checks:

• Evaluate any notices received from the service provider about possible changes to their compensation and the other information they provided when hired (or when the contract or arrangement was renewed);
• Review the service providers’ performance;
• Read any reports they provide;
• Check actual fees charged;
• Ask about policies and practices (such as trading, investment turnover and proxy voting); and
• Follow up on participant complaints.

4) What are common misperceptions or mistakes made when dealing with fiduciary duties?

Some vendors think they can contractually protect themselves from being labeled producers or from having fiduciary exposure, says Fleet. But from a plan sponsor standpoint, if an adviser is performing fiduciary functions, they are a fiduciary.

“I would also note, whether or not you’re acknowledged your fiduciary status, if you are performing fiduciary content, it doesn’t matter what you call yourself; you have fiduciary exposure,” she says. “If you’re remotely going to be serving in that capacity, why not use it to your advantage and come in saying, ‘We’re your partners. We serve in a fiduciary role. We know what that means.’?”

Another mistake Fleet identifies is the lack of governance process and checks that advisers have, even though they are fiduciaries.

“If you’re in a fiduciary role, the way that you demonstrate your protection of participants is to have a governance process in place and to check that, audit it and confirm that you’re following it,” she says.

5) What does the future look like?

“ERISA fiduciary duties are not going away,” Ryan says. “There has been an extraordinary explosion of excessive fee lawsuits under ERISA in the last decade. We expect those lawsuits to continue and new trends in fiduciary lawsuits to emerge.”

“Fortunately, an informed and well-documented fiduciary governance process is well within fiduciaries’ control and capability. Armed with evidence of good plan governance, you may defeat claims of fiduciary breach, including claims related to excessive fees, as efficiently as possible.”

Update: This version updates expert commentary