Definition of a Fiduciary Soon to Be Expanded to Include Anyone Advising a Customer on a Retirement Plan
Marc McDowell, Director, Retirement Plan Services, Bronfman E.L. Rothschild
The Employee Benefits Security Administration announced in September 2011 that it would repropose the rule defining when a person providing investment advice becomes a fiduciary under the Employee Retirement Income Security Act (ERISA). It is anticipated that the rule will expand the definition of fiduciary” to include anyone advising a customer about a qualified retirement plan. While the reproposed definition of fiduciary has not yet been published, it is anticipated to be released in 2014.
Section 3(21)(A) of ERISA defines a fiduciary, with respect to a retirement plan, as an entity or individual that:
- Exercises any discretionary authority or control respecting the management of such plan; or
- Exercises any authority or control respecting the management or disposition of its assets; or
- Renders investment advice for a fee or other compensation; or
- Has authority to render advice; or
- Has any discretionary authority or discretionary responsibility in the administration of such plan.
Basically, anyone who has authority to make decisions regarding the management or investments of a retirement plan is a fiduciary. Fiduciary designation is a matter of function, not title. If the person performs fiduciary tasks, they have taken on the role of a fiduciary.
A plan fiduciary is subject to the fiduciary duties described in ERISA section 404(a), including “acting with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” In other words, the standard of a prudent expert.
Prudent means discreet or cautious in managing one’s activities; circumspect; practical and careful in providing for the future. The standard of a prudent expert requires that the plan’s investment decisions are made with knowledge of the investments — meaning due diligence has been performed on the investment, there is a clear understanding of the risks involved in the investment, and the investment fits with the overall objectives of the retirement plan.
Named fiduciaries are the fiduciaries specifically noted within the plan documents. ERISA section 402(a) establishes and defines the term “named fiduciary.” Many plan documents will identify the employer, plan administrator, and trustee as named fiduciaries.
The employer is responsible for the overall management and oversight of the plan and is a fiduciary, as described in ERISA section 3(21). As the sponsor of the plan, the employer is the starting point for all fiduciary decisions. The employer is responsible for determining the terms of the plan and for appointment and monitoring of other fiduciaries.
The plan document will often also name the plan sponsor or employer as the plan administrator, as described in ERISA section 3(16). The plan administrator‘s fiduciary duties typically include determination and approval of participant benefit payments and interpretation of plan provisions.
The trustee has exclusive authority to manage and control assets, except to the extent that:
- The plan grants authority to a named fiduciary to direct the trustee; or
- Authority to manage, acquire, or dispose of plan assets has been delegated by the named fiduciary, under ERISA section 402(c)(3), to one or more investment managers.
It is very common for participant-directed plans, such as 401(k) plans, to have directed or non-discretionary trustees. Appointment of a directed trustee places responsibility for the management of plan assets with another named fiduciary, typically the employer, unless investment authority is delegated to an investment committee or an ERISA section 3(38) investment manager. If an investment committee is appointed, the employer still retains significant liability and the committee members are personally liable for their decisions. Therefore, it is a good practice for the committee members to obtain indemnification from the employer and have proof of fiduciary insurance.
It is common for plans to have a company officer or owner serve as a discretionary plan trustee. Therefore, it is not unusual for the business owner to be the employer, plan administrator, and trustee. In this case, absent the appointment of an ERISA section 3(38) investment manager, the business owner has complete responsibility for each individual plan investment decision.
Remember, under this situation, the business owner is held to the standard of care described in ERISA section 404(a), including the prudent expert standard described previously.
Why does the fiduciary matter?
The fiduciary is held to the prudent expert standard for all decisions regarding the retirement plan’s investments. This translates into full liability for the retirement plan. Every employer hopes to make sound decisions that translate into successful investment opportunities for their participants, but not all investment decisions will have the desired outcome.
Fiduciaries are not held to the standard of having only successful investment decisions, but are expected to make prudent decisions based on the circumstances at the time. It is important to be able to defend your decisions by demonstrating that a sound process was in place.
Why should I care?
If you serve in the capacity of any of the before-mentioned roles, understanding the responsibilities and liabilities you face is important. For more information on this topic, connect with Bronfman E. L. Rothschild.