With increasing lawsuits surfacing claiming fiduciary breach or negligence regarding their role in an employee benefit plan, employers are taking notice. A heightened level of awareness is permeating the environment and plan sponsors are gaining a much better understanding, at times at a very high cost, of their responsibilities as a fiduciary.
Let’s first discuss “who is a fiduciary?” You are a fiduciary as defined in the Employee Retirement Income Security Act of 1974 (ERISA) if you exercise discretionary authority or control over management of the plan or disposition of assets or have discretionary authority in the administration of the plan, or more simply, those who are responsible for the administration and management of the plan.
Settlor functions, which include plan formation, design, or termination, do not warrant a fiduciary role. A fiduciary can be an employer, officer, committee member, trustee, and/or administrator of the plan. A “named fiduciary” is named in the plan document or pursuant to a procedure specified in the plan and is identified as a fiduciary. Plans governed by ERISA must maintain, at a minimum, one fiduciary.
ERISA defines the responsibilities of the fiduciary in terms of one's duties. The duty of loyalty, the duty of care, the duty to provide investment diversification, and the duty to adhere to plan documents, are all basic responsibilities of a fiduciary.
The duty of loyalty is defined as acting solely in the interest of plan participants and their beneficiaries and defraying reasonable expenses of administering the plan. The duty of care is referred to as the “prudent man rule” which requires a fiduciary to act with 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. The duty of diversification requires the diversification of plan investments to minimize risk of large losses unless under certain circumstances it is not prudent to do so. And finally, the duty of adherence to plan documents means acting in accordance with governing plan documents and instruments (if consistent with ERISA), including investment management agreements and investment policy statements.
ERISA allows a fiduciary to engage co-fiduciaries with specialized expertise in the area of investment advisory services as defined in ERISA 3(21) or 3(38). These co-fiduciaries provide guidance in monitoring the performance of the plan's investments and facilitate the diversification in the plan's portfolio. A 3(21) co-fiduciary serves as an advisor to the plan without the authority to execute on any revision of the plan's investment strategy as this authority remains with the fiduciary of the plan, whereas a 3(38) co-fiduciary has the authority to revise the investment strategy and execute upon its authority, with the broad understanding of compliance to plan documents. These co-fiduciary roles reduce the fiduciary's overall risk but do not preclude the responsibility of on-going review and management of the performance of these service providers.
ERISA also provides for an additional level of reduced risk where “fiduciaries may not be liable for any loss resulting from the participant’s investment elections,” if compliance with ERISA Section 404(C) is met by the plan for plans that are participant-directed. Although many plan fiduciaries may be checking the box on their Form 5500 filing as being 404(C) compliant, many are not meeting these requirements. The requirements of 404(C) are extensive and are dependent upon there being no improper influence by the fiduciary or plan sponsor, and no concealment of material non-public facts regarding investments, unless disclosure would be a violation of law.
To comply with ERISA Section 404(C), the following key points must be met:
- Participant direction of investments
- Qualified default investment alternatives (QDIA)
- Broad range of investment options
- Disclosure of investment-related information
- Proposed Department of Labor (DOL) regulations requiring additional plan-related, investment-related, and expense and fee-related disclosures
The reality of compliance with 404(C) involves extensive communication and transparency of investment options with the participant. A plan fiduciary must be totally confident that their plan is in full compliance with all of the rules and regulations of 404(C) before checking the box on their Form 5500.
While fiduciary liability may be direct and a fiduciary may be held personally liable for any breach of duty, liability is generally limited to the fiduciary’s function. A named fiduciary would have the most extensive responsibility, which would include all phases of plan management. The resulting consequence of a fiduciary breach includes personal liability of any losses to the plan, restoring of any lost plan profits through use of plan assets, and civil fines with criminal implications.
The role of a fiduciary has not been altered or revised over the years. These duties have been defined upon the passage of ERISA. But as the economy shifted and the markets tumbled, losses began to stack up, and as the tide turned, the spotlight began to shine and the fiduciary took center stage. Either the performance was spectacular or it was not.
For more information on this topic, or to learn how Baker Tilly employee benefit plan audit specialists can help, contact our team.