Misconceptions About 405(d)(1)

Among the easiest to fulfill, some Fiduciaries miss the boat.

Conditions for achieving the statutory relief afforded by 405(d)(1) are the easiest to meet. Yet some Plan Fiduciaries unknowingly fail to meet the requirements and forego the liability protection.

I have no liability

Plan sponsor fiduciaries (Trustee, plan administrator, or any individual that exercises judgment or discretion with respect to any aspect of the plan's investments or operations) assume personal liability for their errors and omissions and for the errors and omissions of the co-fiduciaries that they may have been, or should have been, aware of. The prudent expert standard of ERISA is a very high bar. Simply hiring someone or some company to "take care of the plan" and assuming that you can fix problems later is a big mistake.

ERISA and the DOL do not accept ignorance or lack of time, or lack of interest as adequate excuses for what is very serious business, the retirement future of your employees. Being a fiduciary is a very unique position that involves the highest level of personal integrity, diligence, and effort. That means securing the help needed to properly discharge obligations that require the expertise of professionals.

Many plaintiff attorneys are turning their attention to ERISA plans as a potential new market in the wake of recent corporate scandals (Enron, Worldcom, Adelphia and the mutual fund short-term trading and late-day trading). ERISA and the DOL regulations provide a treasure trove of potential "rule violations" that can be used to place blame for market losses, or even for mediocre performance.

Liability exists not just for actual losses in a Plan. Liability can exists for what a Plan should have earned. A recent case involving a Painter's Union retirement trust in Pennsylvania resulted in an $8 million dollar judgment against the Trustees for allocating all assets to bonds during the run-up of the stock market in the mid 1990s.

Many Plan Fiduciaries feel that the discussion of personal liability is a "scare tactic" used by investment salespeople to help close a sale. Whereas that is often the case, such criticism does not negate the fact that the Prudent Expert Rule does impose significant personal liability on the Plan Fiduciary.

Other Plan fiduciaries simply think of themselves as "small fish," that the Department of Labor's attention is elsewhere. They believe they have no real risk of audit.

Still others think that the standard of care is not that high. "I picked good funds and that should be enough." Such Plan fiduciaries have convinced themselves they are right. Hopefully, they will never have to convince the DOL or a court of law they are right since the burden of proof will be their's.

Employee Satisfaction

No employee of mine would ever complain

Employers value their employees and appreciate the commitment and loyalty they see. This does not mean, however, that a loyal employee will not initiate an action with the DOL if their retirement appears to be in jeopardy. From the employee's perspective you and the company have an obligation to provide a reasonably vetted retirement platform to deliver "solid" investments at reasonable cost with relatively good service. If you fail to properly select your retirement plan service providers and properly supervise them, the employee is certainly within his rights to question you and potentially to file a complaint.

The Department of Labor initiates random audits without the impetus of a complaint from a Plan participant.

The IRS can audit your plan and refer any findings of interest to the DOL for further attention.

The IRS burden for reviewing GUST Restatements of Plan documents is largely behind it, allowing a significant number of Plan Reviewers to be trained as Field Auditors. Practitioners expect the frequency of IRS audits to rise in coming years.

Great Big Companies

Having our plan with a national company is protection enough

The Department of Labor has not issued a Safe Harbor or any statutory relief for simply contracting with a large national company to handle your retirement plan. Unless the large national firm acknowledges its co-fiduciary status in writing, a Plan fiduciary has no more statutory protection with a big company than with a small company.

Unless the national company specifically contracts for providing 404(c) compliance, the full burden still falls upon the Plan Fiduciary. The requirements of 404(c) go beyond the provision of template forms and notices that most companies will provide a plan as a normal part of their service. The requirements include proper menu construction (405(d)(1) statutory protection is very handy for this), proper reporting to complete adequate oversight of the menu, proper delivery of prospectus and investment option information, complete and timely notices, and adequate participant education to name a few.

The comfort many Plan fiduciaries perceive having retained a great big company is the thought that these companies ought to know what they are doing. With as many Plans that must invest them, surely if there were any problems they would have come to light already.

404(c) imposes a burden of proof of compliance on each and every transaction resulting from a participant or beneficiary's decision. The Plan fiduciary must evaluate the ability of any service provider, big or small, to give his Plan the level of attention operational compliance will demand.

It's my broker's problem

I use a broker and it's his liability, not mine

Many plan sponsors utilize the services of a broker (someone licensed to buy and sell securities under the auspices of a Broker/Dealer firm) and feel that if there is any problem with the investments chosen by the broker, the broker has the sole liability. In fact, the broker may well have liability, but you are the fiduciary and you cannot escape, unless he/she is a qualified investment manager or advisor that signed on as a co-fiduciary in writing under 405(d)(1) giving you statutory relief. You as the fiduciary will be held liable and your personal assets will be at risk. Lose the lawsuit first, and if you have any money left, sue the broker.

I already have an Investment Advisor

Does the Plan have an Investment Adviser or Investment Manager?

Investment Manager is a precise legal term. The Securities and Exchange Commission (SEC) use of "adviser" is different from the DOL's reference to "Manager." Not all advisers are managers. In order for an adviser to be included in the definition of an investment manager (ERISA Section 3(38)) the adviser must be registered as an investment adviser under the Investment Advisers Act of 1940, or meet the definition of a bank as defined in that Act, or be an insurance company meeting certain definitions. There are many individuals called financial advisers that do not qualify under the definition and cannot provide you with statutory relief.

I have a Corporate Trustee

The Corporate Trustee assumed my liability

A Corporate Trustee is almost always a "non-discretionary" trustee. Such a corporate trustee will NOT make any investment decisions regarding the Plan's assets. It only acts upon specific instructions from the Plan Sponsor.

The Plan Sponsor has only changed the title of the person whose responsibility it is for investment oversight. Instead of Employee A of the company being the Trustee, Employee A is now the "Investment Committee," having the identical liability for investment management he would have had if he remained as Trustee. The Investment Committee instructs the non-discretionary Corporate Trustee as to which investment options are to be made available to participants and beneficiaries. All members of the Investment Committee now have the personal liability.

A Corporate Trustee's primary liability is for "ministerial mistakes," the failure to execute instructions properly. A non-discretionary trustee exercises very little independent professional decision-making for determining the course of action for special events and transactions-perhaps no more than a regular custodian and Third Party Administrator would affect.

Generally, the Corporate Trustee is also the Custodian of the Plan Assets. Ask your Corporate Trustee for a written list of what additional duties it performs as Corporate Trustee that it would not perform as a custodian.

The difference in duties might only amount to its willingness to "certify" the statements of the custodial account.

A certified statement of Plan assets will help reduce a Plan's audit costs. Many custodians will certify statements without the necessity to be the Plan's Corporate Trustee.

Some custodians will act as Corporate Trustee without additional charge from that of being a custodian.