Employees call you with questions. You conduct employee orientation where you explain your plan to new hires. You collect enrollment forms and loan applications and handle participant terminations and distribution requests. At least one employee at each orientation session has asked you what investment funds you selected to save and invest your deferrals. Your plan clearly says Susan Smith is the “Named Fiduciary.” You are off the hook, right? Well, not so fast. Read on.
Fiduciary responsibility can attach to you, even when you are unaware of it. Somewhat like bubonic plague, it is easy to share, but difficult to get rid of. Every company-sponsored retirement plan comes with fiduciary liability. Generally, any individual who has discretion over plan assets, management, or administration of a benefit plan, or who is paid to provide investment advice to a plan, can share it. For this reason, employers who sponsor retirement plans need to learn what fiduciary liability is; who has it; how one gets it; what responsibility comes with it; and how to ensure the fiduciaries of your plan are aware, informed, and protected from unnecessary exposure and risks that accompany fiduciary responsibility. The Employee Retirement Income Security Act (ERISA) governs the identification of, standards of behavior for, and designation of fiduciaries.
Identify the Fiduciaries
Most plans have more than one. ERISA recognizes both a Functional Fiduciary and a Fiduciary in Fact. ERISA section 402(a) requires the Named Fiduciary to be identified in the plan document. This is generally the employer, the employer’s board of directors, or the employer’s retirement plan committee or other appointed committee. Smaller plans may actually put the person’s name or position into the plan document. Other individuals can take on fiduciary status by their behavior alone. This requires a careful analysis of facts and circumstances.
Whether an individual is a Fiduciary in Fact is determined by the behavior or actions taken by the person. Any individual who exercises discretion over plan assets, operations, or decisions can be a Fiduciary in Fact. Courts have confirmed that fiduciary administration functions encompass even such activities as communicating plan terms and choices to participants and beneficiaries. In a case from the late nineties, it was argued that an individual employee, who had acted as a fiduciary in fact, was liable for the action. The Ninth Circuit Court of Appeals ruled the individual was a fiduciary since he exercised control, even though it was not clear whether he was ever authorized to do so. Yeseta v. Baima (9th Cir. 1989). The individual was never designated a plan fiduciary but, even so, the court held he was a responsible fiduciary.
Fiduciaries typically include trustees, investment advisors, all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee or retirement plan committee, and those who select committee officials. Attorneys, accountants, and actuaries are not fiduciaries when acting solely in their professional capacities. The key to determining whether an individual or an entity is a fiduciary is whether they exercise discretion or control over the plan.
Courts tend to construe fiduciary status quite liberally. As the term fiduciary evolves, we see courts expand the general policies and objectives of operating the plan in the best interests of participants and beneficiaries (not the plan sponsor). This generally describes the standard of care, duty, and prudence required of each fiduciary.
Fiduciaries are jointly and severally liable for one another’s actions. If you serve as a fiduciary with a co-fiduciary who performs bad acts—even if you are unaware of those acts—a court may decide you “should have been aware” of them. This failure to know, when you should have known, is in itself a fiduciary violation! Generally, a fiduciary that knowingly participates in a co-fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, also becomes liable for it.
Educate the Fiduciaries
Fiduciary duties are the highest known in law. While a trustee is held to something stricter than the morals of the marketplace, fiduciaries are subject to three different and overlapping standards of ERISA section 404. Since fiduciary liability can pass to an individual fiduciary’s own person and assets, employers should fully brief any fiduciary, ensuring they are aware of the standards of behavior and that they consult professionals when it comes to complex situations or other required due diligence. MSEC can tailor a fiduciary briefing to your board or plan committee, for members who request one, on a for-fee basis.
Fiduciaries are expected to uphold certain duties with the skills of a prudent person and to follow specific standards of conduct, including:
- Acting solely in the best interests of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
- Carrying out their duties prudently
- Following plan documents (unless inconsistent with ERISA)
- Diversifying plan investments
- Paying only reasonable plan expenses
The duty to act prudently requires expertise in a variety of areas. Lacking that expertise, a fiduciary should hire someone with the professional knowledge to carry out the investment or other complex responsibilities. Prudence focuses on the process followed when making fiduciary decisions—even more than the actual decision. This is why it is important to document your process for reaching plan-level decisions. A common example is to survey a number of potential providers or even conduct a formal request for proposal asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a thoughtful comparison and proper selection.
Future articles will discuss retirement plan bonding requirements, indemnification practices, and insurance protections available to support and protect your plan and plan fiduciaries. Remember, you may be one of them!