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405(d)(1)

Statutory relief for retaining the services of an Investment Manager

The Prudent Man Rule promulgated under ERISA Section 404(a)(1) sets a high standard for the performance of the Plan fiduciary. ERISA statutes encourages the delegation of investment oversight by providing an avenue to statutory relief in Section 405(d)(1):

If an investment manager or managers have been appointed under section 402(c)(3)*, then, notwithstanding subsections (a)(2) and (3) and subsection (b), no trustee shall be liable for the acts or omissions of such investment manager or managers, or be under an obligation to invest or otherwise manage any assets of the plan which is subject to the management of such investment manager.

*ERISA Section 402(c)(3) expressly authorizes named fiduciaries to appoint investment manager(s) for the management of any assets of a Plan.

Conditions to be Met

All advisors and consultants are not Investment Managers!

ERISA Section 3(38) defines the term investment manager.

The term "investment manager" means any fiduciary (other than a trustee or named fiduciary, as defined in Section 402(a)(2))—

  1. who has the power to manage, acquire, or dispose of any asset of a plan;
  2. who is (i) registered as an investment adviser under the Investment Advisers Act of 1940; (ii) is a bank, as defined in that Act; or (iii) is an insurance company qualified to perform services described in subparagraph (A) under the laws of more than one State; and
  3. has acknowledged in writing that he is a fiduciary with respect to the plan.

Do not confuse an Investment Manager with an Investment Advisor or Investment Consultant. Investment Manager is a precise legal term used within ERISA statutes to describe the ONLY entities that can provide relief from the fiduciary liability to manage plan assets as an expert.

Even though a Plan's advisor, consultant, or broker may be deemed to be a fiduciary, they may not meet the qualifications for appointment as an Investment Manager or be willing to acknowledge in writing their fiduciary status.

Safe Harbor status?

How difficult is it to secure the protection this statute offers?

The liability protection ERISA Section 405(d)(1) offers is easily attained, notwithstanding that it is not a Safe Harbor . Perhaps the greatest difficulty is finding an advisor who is both competent and can fulfill the conditions of ERISA Section 38 (which among other things requires a written acknowledgement of fiduciary status.)

It is very important to understand that the decision to appoint an investment manager is in and of itself a fiduciary decision for which 405(d)(1) does not offer relief.

Appointment of an investment manager must be accomplished with due and prudent consideration of the investment advisor's expertise in the context of the needs and objectives of the plan, its participants, and beneficiaries. Trustees should document their decision process in selecting and appointing the investment manager including reference to the investment climate at the time, the investment and funding objectives for the plan at the time, and the criteria by which ongoing performance is to be measured. One of the most appropriate ways to accomplish much of this is to develop and adopt a Statement of Investment Policy for the plan.

Whereas a safe harbor implies a "port in the storm" and ERISA Section 405(d)(1) does offer relief from personal liability associated with the management of Plan assets, 405(d)(1) is NOT a Safe Harbor in the legal sense.

A Safe Harbor is a prescribed set of procedures that if followed will be considered fulfillment of statutory mandates. A Safe Harbor allows, in the instance of ERISA, for a fiduciary to argue that the procedures which were implemented fulfilled the statutory requirements, notwithstanding the prescribed method of the Safe Harbor .

Required Oversight

Delegation to an Investment Manager requires regular oversight

The Department of Labor regulation paragraph 2509.75-8, FR-17 recites the extent of the guidance provided for the monitoring of an Investment Manager

At reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan. No single procedure will be appropriate in all cases; the procedure adopted may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the procedure.

Plan fiduciaries have the responsibility under ERISA Section 405(d)(2) for both the decision to appoint an investment manager and obligation to periodically monitor the performance of such investment manager with reasonable diligence.

 

Congress anticipated that few Plan Fiduciaries would possess the expertise ERISA would require of them to manage Plan assets.

The high standard set by ERISA for fiduciaries to properly manage plan assets along with the express conditions established for delegating this responsibility amount to very strong encouragement for plan trustees to seek the services of properly qualified investment managers and advisors as appropriate given the needs of the plan, its participants and its beneficiaries.