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The Accidental Fiduciary
Accidental fiduciaries are individuals who are responsible for administering a plan but are not intended to be plan fiduciaries. They are identified as people who exercise individual discretion and interpretation over provisions of the plan document or the plan’s written procedures.
Avoiding creating an accidental fiduciary is critical to a retirement plan’s financial well-being. And the primary reason that it all matters can be summed up as -- unintentional breaches of duty have harsh consequences.
These people can put your organization in a very vulnerable position, especially if the individual is not compensated by the plan sponsor or covered by the plan sponsor’s fiduciary liability insurance policy.
To use a saying dating as far back as George Washington, “the best defense is a good offense." This means proactively taking control of a situation is often the most effective way to protect the plan and participants and help everyone achieve their goals rather than passively waiting for an attack or issue to arise. A plan sponsor should define plan-related roles and responsibilities to avoid creating an accidental fiduciary in the first place.
Who is a Fiduciary?
The EBSA states fiduciary status is based on the functions performed for the plan, not just a person’s title, and that a plan must have at least one fiduciary (a person or entity) named in the written plan – either by position title or by name. Below are position titles that are typically understood as plan fiduciaries:
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The Plan Administrator
The Employee Retirement Income Security Act (ERISA) requires that businesses have a “plan administrator” designated under their plan. The plan administrator is responsible for managing the plan’s daily operations, ensuring it remains compliant and upholds its integrity. These responsibilities are determined by ERISA and the terms of the plan. An individual, a committee, or the plan’s sponsoring employer can function as the plan administrator.
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Trustee
Your retirement plan’s trustee has exclusive authority to manage and control plan assets. Plans may also use a “directed” trustee, whose duties are subject to the direction and oversight of a fiduciary who is not the trustee. The trustee is responsible for administering the plan in a way that fits the documented agreements and benefits its participants and their beneficiaries.
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Most “C-Suite” Executives
While there is no specific requirement that company executives, such as the CEO or CFO, automatically be considered fiduciaries, the nature of their position often means that these individuals are named when discussing those held to fiduciary standards for your plan.
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Named Fiduciary
ERISA requirements state the plan document shall provide for one or more “named fiduciaries” who have the authority to control and manage the operation and administration of the plan.
Many plans designate a single “named fiduciary,” such as a retirement plan committee, but the plan document can identify more than one named fiduciary and distribute fiduciary duties among them. For example, a plan document might list two committees as “named fiduciaries.” One committee might be tasked with selecting and monitoring plan investments, while the other may be responsible for overseeing all other plan administration tasks and compliance efforts.
What are the Duties of a Fiduciary?
Under ERISA, a plan fiduciary has six core duties:
- The duty to act prudently when administering the plan
- The duty to diversify the assets of the plan
- The duty to comply with the provisions of the plan
- The duty of loyalty
- The duty to pay only reasonable plan expenses
- The duty not to engage in certain prohibited transactions
The duty to act prudently is a central responsibility that focuses on the process of making fiduciary decisions.
Each duty carries with it unique responsibilities, which, if not properly executed, can result in what is known as a fiduciary breach. ERISA imposes personal liability on fiduciaries for losses sustained by the plan. Additionally, the court may also provide additional judgments as it deems necessary and/or appropriate.
When to Employ an Expert?
As a retirement plan sponsor, you have two options for meeting your fiduciary responsibilities:
- Adopting and implementing carefully designed internal controls; or
- Engaging an expert partner to ensure that appropriate measures are followed on your behalf, thereby shifting the burden of compliance to your firm’s plan service provider and your responsibility to the selection and oversight of your selected service provider.
The standard of professional responsibility, as set by ERISA, can include selecting and monitoring plan investments, preparing items such as an RFI for recordkeeping costs, confirming vendor fiduciary commitments, eliminating conflicts of interest, and a variety of other critical hazards.
If you aren’t sure what questions to ask or how to accomplish these tasks, the best course is to get help. In fact, hiring an expert partner is in and of itself a fiduciary function. A plan sponsor should not take the position that they must bear the full responsibility of fulfilling their duties on their own.
How to Limit Liability
Establishing procedurally prudent processes and diligently documenting those processes used to perform your duties can be the most effective path to reduce possible liability.
If questioned by the Department of Labor (DOL) about a decision made while performing the duties of a fiduciary, the law states that, a procedurally prudent process that has been carefully documented is defensible and a possible limitation of liability.
Monitoring of fees, investment options, prohibited transactions, and conflicts of interest are ways in which a plan fiduciary may reduce exposure to high-risk liability issues.
Why it All Matters
Fiduciary duties under ERISA “are the highest known to the law.”
It is essential for every plan sponsor to understand their responsibilities under ERISA. They should remain informed and keep a close eye on recordkeeping, administration, and investment fees. While decisions don’t need to be flawless, they should always be made with prudence.
Since approximately 2005, fiduciary liability litigation has been on the rise across the country. On average over the last 5 years, 72 cases per year have been filed. Fiduciary liability litigation is expensive to defend and costly to settle. Depending on plan size, many cases have settled for $10 million or higher. Even retirement plans with less than $5 million in assets have been targeted by excessive fee litigation. It is not anticipated that the litigation environment will slow down in the near future.
Additional avenues through which litigation can arise and create angst for plan sponsors include topics such as diversification of underperforming investments, ESG, use of forfeiture accounts, and cybertheft.
Plan sponsors must never forget that participants are people, and account balances are often shorthand for the sum total of an entire life’s work.
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