Retirement Plan Consultants/ERISA Advisor to Fiduciaries

Q:  My employer has me chairing our retirement plan committee.  Am I a fiduciary?  Should I be concerned?

A:  Well, it depends.  ERISA defines a fiduciary by function, not by position or title.  If you perform one of the functions ERISA defines as "fiduciary function" you are a fiduciary - even if don't want to be a fiduciary!  Three categories of functions are defined as "fiduciary functions" by ERISA.  First, if you exercise discretion in the management of the plan, you are a fiduciary.  Management of the plan involves determine the "who" and "where" of plan administration.  That is, if you have discretion in determining who the service providers are that will provide administrative services to the plan, or those who will provide other fiduciary services to the plan (such as the trustee, investment advisors, and the like), then you are a fiduciary under ERISA.  Second, if you provide investment advice to the plan or it's participants, either directly or indirectly, on a regular basis for compensation, ERISA deems you a fiduciary.  Providing an investment option for consideration or expressing a preference for a favorite investment doesn't qualify - under ERISA, the advice must be provided on a regular basis, and for compensation (although, the compensation doesn't have to be specifically linked to the advice - if you are an employee of the plan sponsor drawing a salary for all of the service you provide, and part of your duties is to provide this type of investment advice on behalf of the plan, you meet this functional test for being a fiduciary.  In addition, the advice must be given with the intent that it will be followed by the plan (whether or not it is actually followed).  Giving a "hot tip" on the investment du jour is probably not intended to be followed - and wouldn't meet the "regularity" requirement anyway.  Third, if you have discretion in the administration of the plan, or have control over plan assets, you are a fiduciary.  The first part of this functional definition of a fiduciary (discretion over plan administration) seems redundant with the first (discretion over the management of the plan).  The difference is that having discretion over the administration of the plan means you have authority to make decisions over the operation of the plan.  This would include determining whether an individual has met the requirements to participate in the plan, determining whether a participant has met the requirement to receive a loan, hardship, or other distribution, resolving conflicts and the like.  While much of this may seem like the decisions are pre-ordained by the plan's design, there is still an element of discretion in applying the plan's rules.  For example, if the plan allows for hardship distributions using preset criteria - then discretion is involved in determining whether the specific criteria has been met, and whether the "proof" offered by the participant is sufficient.  The second part of this functional definition deems an individual as a fiduciary if they have control over the assets of the plan.  It doesn't involve any discretion - merely having the power (even if you don't have the right) to move or manage the assets makes you a fiduciary.  This latter part of this functional definition is controversial - especially among bundled service providers who zealously maintain that their services as "non-discretionary directed trustee" does not make them a fiduciary.  I, and the DOL, disagree.  Having the power to control plan assets makes the trustee a fiduciary - however, if the plan and it's fiduciaries properly delegate the right to control plan assets to another fiduciary, then the directed trustee is only "fiduciarily" liable for breaches of it's limited duties in following the directions of the other plan fiduciaries and protecting the assets under it's control.  If the trustee in any way independently exercise control over plan assets, it will assume full fiduciary liability under this provision of ERISA.  The DOL's Field Assistance Bulleting explaining their position on this issue can be found here.

So the answer to the first question - "am I a fiduciary" depends on whether you perform any functions described in ERISA as fiduciary functions.  If the committee you chair has discretion in management or administration of the plan, or manages the investments, then yes, you are a fiduciary.  It would be rather uncommon for a committee responsible for a retirement plan to not perform fiduciary functions, making all members of the committee fiduciaries under ERISA.

The second question, "should I be concerned" is difficult to answer.  Many people are afraid of the being deemed a fiduciary under ERISA - for good reason - as being an ERISA fiduciary make you personally liable for all breaches of fiduciary duties that you participate in, or are aware of but fail to stop or correct.  This latter part basically makes each fiduciary personally liable for the fiduciary breaches of every other plan fiduciary that they are aware of (or should be aware of), unless they take appropriate steps to stop the breach and correct the effect on the plan - including suing those other fiduciaries on behalf of the plan to recover any losses suffered by the plan as a result of their breach.  Sounds scary, doesn't it.  Well the solution is rather simple.  First, understand your responsibilities as a fiduciary under ERISA.  An explanation of those responsibilities can be found in this document.  Second, don't breach your fiduciary duties.  Third, ensure your are well informed about hte actions of your co-fiduciaries, and ensure they don't breach their responsibilities.  It seems simple, but the truth of the matter is that it isn't bad to be a fiduciary, it's just bad to be a bad fiduciary.

Q:  OK.  So I'm a fiduciary.  What are my responsibilities?

A:  That's easy.  There are only four responsibilities that plan fiduciaries have.  First, plan fiduciaries must exercise their authority to operate the plan and use the plan's assets to exclusively to provide benefits to the plan participants and their beneficiaries, and to defray the reasonable expenses of so doing.  This is often referred to as the ERISA's "exclusive benefit rule."  What it means is that when operating as a fiduciary, all decisions must be made so as to give effect to the plan's provisions and purpose in providing the benefits described.  Plan assets can be used for no other purpose - except for paying the reasonable fees of operating the plan - than providing the specified benefits.  Using the plan or its assets directly or indirectly to provide a benefit to the employer, or any other person or entity is strictly prohibited.  Obviously, dipping into plan funds for corporate purposes would violate this rule, but using the plan as a "bargaining chip" to obtain other corporate benefits would also be a violation.  For example, if a plan sponsor agrees to move the plan to a new vendor in order receive other benefits (discounted banking services, consideration for loans or lines of credit, etc.) that would also be a violation.  Basically, the rule requires plan fiduciaries to use a singular focus when making plan fiduciary decision - that of operating consistent with the exclusive benefit rule - and to ignore any ancillary corporate or other considerations.

In addition, this is the provision of ERISA that requires plan fiduciaries to assess the reasonableness of fees charged to the plan.  Another Q&A will address fee issues, but suffice it to say that plan fiduciaries, as fiduciaries, need only be concerned with fees that are charged against plan assets or the plan itself, and fiduciaries, as fiduciaries, need not be concerned with the reasonableness of fees paid out of corporate coffers.  Plan fiduciaries, as employees of the employer, however, may be concerned with those fees!

Second, plan fiduciaries must function as "prudent experts" in making fiduciary decisions.  The law has for quite some time required that fiduciaries operate as a "prudent person" would in managing the affairs of another.  ERISA elevates this standard to that of a "prudent expert" which essentially means that fiduciaries must employ the care, skill and diligence that one familiar with (and some would say proficient in) the matters undertaken.  That is, in making investment decisions, the plan's fiduciaries will be held to the standard of that applied to professional investors.  In managing other aspects of the plan, fiduciaries will be held to the standard of professionals in making those decisions.  The one common trait of experts in a field is that they use a disciplined approach in decision making.  That disciplined approach requires five things.  First, there must be a process in place that ensures when the same or substantially similar inputs are considered, the same, or a substantially similar outcome will arise.  ERISA requires no specific outcome, but does require that all participants in similar situation be treated similarly, unfettered by the whims of a decision maker.  A process is required to ensure such uniformity.  Second, the inputs must be complete and relevant.  Part of the process should be to identify what are the salient pieces of information to consider, and ensure that they are obtained prior to making a decision.  Third, the process and outcomes should be documented.  Much has been written about how much documentation is enough, and how much is too much.  Many people think that by documenting what they have done will come back to haunt them.  That's true, but only if you've done something hauntingly inappropriate.  Suffice it to say, the right amount of documentation is that amount which demonstrates that 1) the decision was based on all relevant information; 2) the decision was made by following the established process; and 3) that a decision was made (and what that decision is).  Fourth, when appropriate, the process should be modified based on changes in circumstances or the availability of additional information that demonstrates that the process isn't working or could be improved.  Doing something a certain way just because you've also done it that way is not consistent with being a prudent expert and a fiduciary.  Fifth, and finally, prudent experts will revisit, re-evaluate, and reverse prior decisions if and when information comes to light that indicates the original decision may have been made in error, or at least with incomplete or erroneous information.  Nothing is really ever settled.  Being a prudent expert means always striving for a perfect decision making paradigm with perfect informational inputs, knowing that it can never be achieved.  But prudent experts constantly strive for improvement in that process and outcomes.

The third responsibility of a fiduciary is to diversify the assets of the plan so as to minimize the risk of large losses.  In the current environment of allowing participants to select their own investments from a preselected menu, this requirement has been held to mean that plan fiduciaries need to ensure that the menu offered will allow each participant to create a well diversified portfolio appropriate for them.  Under regulations issued by the Department of Labor under ERISA Section 404(c), which allows plan fiduciaries to reduce liability and risk in participant directed plans, this requirement has been somewhat expanded to require 1) at least three investment options; 2) each of which is diversified and which taken as a whole allow the creation of a diversified portfolio; 3) with sufficient trading liquidity based on the underlying investments; 4) which allows  participant to structure a diversified portfolio with risk and return characteristics within the normal range of risk and return characteristics for such a participant.  Do that, and your home free....

Finally, plan fiduciaries must follow the terms of the plan, unless it would be a violation of one of the other three responsibilities ERISA imposes on fiduciaries.  Generally when a co-worker asks me a question about a plan, I respond by asking the question: "what does the plan say?" and it is amazing how many time people forget to consult the documents to search for an answer.  ERISA requires adherence to the plan documents (primarily so that interested parties - especially the participants - know what has been promised, and how benefits will be delivered to them), and raises that adherence to the level of a fiduciary responsibility.  The only exception to this responsibility is that if any of the other three responsibilities require action inconsistent with the terms of the written documents, then the plan fiduciaries must ignore the plan, and fulfill their other responsibilities.  The best example of a situation that might require abandoning the terms of the plan involves company stock as an investment within the plan. If a plan provides that certain assets be invested in company stock (such as in an ESOP plan), but prudence would dictate (under either the prudent expert responsibility or the diversification responsibility) that the company stock investment be liquidated, then plan fiduciaries would have to ignore the terms of the plan and do that which the other responsibilities require.  Prior to undertaking such a potentially drastic step (and career limiting!), it's always advisable to seek professional advice, establish an appropriate prudent process, obtain all relevant information, document the process (and the reasons for taking steps in contravention of the plan documents) and lay out the plan - just a prudent expert would!

Sounds simple, doesn't it?  As always, we here to help by explaining further, and helping to implement best practices in managing fiduciary responsibilities.

Stop back later to see additional Q&A's about general fiduciary issues.

Copyright © 2013 Michael J. Olah & Associates, LLC
Last modified: 10/17/13

Visitors: