IMHO: Duty Calls?

Now, for the most part, those in the first category are in pretty good shape.  Oh, there are a plethora of ways in which a fiduciary can fail to uphold his or her responsibilities under the Employee Retirement Income Security Act (ERISA)—but, in my experience, if you’re at least trying to do the right thing(s), and taking the time to document that effort, you’re in good shape.  Still, even those who are trying to do the right things—and who embrace that role—don’t always fully appreciate the implications.   

The second category mostly tends to include those folks or firms that provide services to the retirement plan fiduciaries.  Most enjoy that status because they don’t technically have any authority to do anything on their own; they just help those who do know what to do.  Of course, there are some who think they are in the second category—who are actually in the third category. 

As for that third category—well, if your plan sponsor clients are there, IMHO, it means you aren’t doing your job as a plan adviser.  Here are seven things that every plan sponsor should know about being a fiduciary: 

(1) If you’re a plan sponsor, you’re a fiduciary. 

Fiduciary status is based on your responsibilities with the plan, not your title.  If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control.  If you’re not sure—and are worried that you aren’t sure—there’s a good chance you are. 

Note that every plan must have at least one fiduciary (either a person or an entity) specifically named in the written plan document, a “named fiduciary” that is either identified by office or by name. 

Of course, if there is a title less well-understood than “fiduciary,” it may well be “plan sponsor.” 

(2) For the very most part, you can’t offload or outsource your fiduciary responsibility.   

ERISA has a couple of very specific exceptions; more precisely, ways in which you can limit—but not eliminate—your fiduciary obligations.  One exception has to do with the specific decisions made by a qualified investment manager—and, regardless, you remain responsible for the prudent selection and monitoring of that investment manager’s activities on behalf of the plan.  The second exception has to do with specific investment decisions made by properly informed and empowered individual participants in accordance with ERISA’s 404(c).  Here also, even if your plan meets the 404(c) criteria (and it is by no means certain it will)—you remain responsible for the prudent selection and monitoring of the options on the investment menu from which they are selecting ⁽¹⁾. 

Outside of these two exceptions, you’re essentially responsible for the quality of the investments of the plan—including those that participants make.   

(3) If you’re responsible for selecting those who are on the committee(s) that administer the plan, you’re a fiduciary.  If you are able to hire a fiduciary, you’re (probably) a fiduciary. 

The power to put others in a position of power regarding plan assets is as critical as the ability to make decisions regarding those investments directly. 

(4) Hiring a co-fiduciary doesn’t keep you from being a fiduciary. 

Moreover, all fiduciaries have potential liability for the actions of their co-fiduciaries.  If a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals that breach, or does not take steps to correct it, both are liable. 

(5) You have personal liability as an ERISA fiduciary.   

That’s right, the legal liability is personal (you can, however, buy insurance to protect against that personal liability—but that’s not the fiduciary liability insurance you may already have in place). 

You may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets.  Consider that, in the Enron case, the outside directors and committee members settled for about $100 million, most of which was paid by the fiduciary insurer. However, the individuals also had to pay approximately $1.5 million from their own pockets. 

(6) Once you’re a fiduciary, you can’t just quit and walk away. 

The Department of Labor cautions that “fiduciaries who no longer want to serve in that role cannot simply walk away from their responsibilities, even if the plan has other fiduciaries. They need to follow plan procedures and make sure that another fiduciary is carrying out the responsibilities left behind. It is critical that a plan has fiduciaries in place so that it can continue operations and participants have a way to interact with the plan.” 

(7) You’re expected to be an expert—or to hire help that is. 

ERISA’s Prudent Man rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard.  None other than the Department of Labor itself notes that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.” 

As a plan fiduciary, it’s never too late to start doing the right things the right way.  But doing the right things means understanding what is expected of you—and appreciating the implications.   

For more information, see Fiduciary Fundamentals

See also http://www.dol.gov/elaws/ERISAFiduciary.htm 

⁽¹⁾ With the enactment of the Pension Protection Act of 2006 (PPA), fiduciaries who automatically enroll participants in accordance with the provisions of the automatic enrollment safe harbor into a qualified default investment alternative (QDIA) get the protections of 404(c ) for those balances.  However, the plan fiduciary remains responsible for the prudent selection and monitoring of the QDIA itself.