What are the Fiduciary Rules?
Every plan must have a fiduciary(s) responsible for the operation of the plan. A fiduciary can be identified as a person or as an office, such as a company’s board of directors. Many plans have several fiduciaries, each being responsible for a different aspect of the plan’s management. Fiduciaries can be held liable if they fail to properly carry out their responsibilities and also for the mistakes of another fiduciary; therefore it is critical to understand the actions that cause one to become a plan fiduciary.
Fiduciary status is based on the functions performed for the plan. The ability to exercise discretion or control over plan assets is generally the leading indicator of whether someone is considered a plan fiduciary. General business decisions are not considered fiduciary acts.
Following is a quote from the DOL’s brochure entitled: Meeting Your Fiduciary Responsibilities:
“What Is The Significance Of Being A Fiduciary?
Fiduciaries are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
- Carrying out their duties prudently;
- Following the plan documents (unless inconsistent with ERISA);
- Diversifying plan investments; and
- Paying only reasonable plan expenses.
The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions. Prudence focuses on the process for making fiduciary decisions. Therefore, it is wise to document decisions and the basis for those decisions. For instance, in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.
Following the terms of the plan document is also an important responsibility. The document serves as the foundation for plan operations. Employers will want to be familiar with their plan document, especially when it is drawn up by a third-party service provider, and periodically review the document to make sure it remains current. For example, if a plan official named in the document changes, the plan document must be updated to reflect that change.
Diversification – another key fiduciary duty – helps to minimize the risk of large investment losses to the plan. Fiduciaries should consider each plan investment as part of the plan’s entire portfolio.
Once again, fiduciaries will want to document their evaluation and investment decisions.”
The following are typical fiduciary roles within a plan:
- Trustee
- Investment Advisor
- Plan Administrator
- Administrative Committee
Occasionally there is confusion as to whether someone is considered a plan fiduciary. It is important not to make the determination solely based on a title, and instead to review the specific plan responsibilities. For example, investment advisors that only provide general investment education are not considered to be performing fiduciary acts. Investment advisors that provide individualized investment advice to participants are considered fiduciaries since they are exercising discretion.
As the operation of a plan becomes more complex, many employers decide to delegate fiduciary functions to other individuals or entities. The employer is nonetheless still a fiduciary. The employer is also responsible for monitoring the actions of their co-fiduciaries. For example, when an employer hires an investment advisor to be responsible for selecting and monitoring plan investments, the employer can potentially be liable for the actions of the investment advisor if they become aware of an advisor’s breach of responsibility and do nothing to correct it.
One of the responsibilities of the fiduciary is making sure that investments offered under the plan are prudent, and thus, the fiduciary must follow the prudent person rule.
It is expected that the Department of Labor will be issuing new proposed regulations on the definition of fiduciary in 2014. We will keep you posted.
ERISA 3(21)
A person is a fiduciary with respect to the plan to the extent:
| 1. | the individual exercises any discretionary authority or discretionary control respecting management of the plan or exercises any authority or control respecting management or disposition of the plans assets, | |
| 2. | the individual renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the plan, or has any authority or responsibility to do so, or | |
| 3. | the individual has any discretionary authority or discretionary responsibility in the administration of the plan. Such term includes any person allocated discretionary authority or responsibility over the plan’s administration. |
Determining a fiduciary is a functional test.
ERISA 3(38)
The term investment manager means any fiduciary (other than a trustee or named fiduciary):
A. who has the power to manage, acquire, or dispose of any asset of a plan;
B. who
i) is registered as an investment advisor (registered under the Investment Advisers Act of 1940), or ii) is not registered under the Investment Advisers Act of 1940 because of section 203A(a), but is registered as an investment adviser under the laws of the State in which its principal office and place of business and files a copy of the state registration with the Department of Labor, or iii) is a Bank, or iv) is an insurance company qualified to perform investment management services under state law; and C. who has acknowledged in writing that he is a fiduciary with respect to the plan.
