Home
Contact

Fiduciary Status

If you're involved in Plan operation, you might be a Fiduciary

ERISA Section 3(21)(A) states:

Except as otherwise provided in subparagraph (B), a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 405(c)(1)(B).*

The Mutual Funds into which Participants invest their account balances are NOT fiduciaries. ERISA Section 3(21)( B) exempts mutual funds registered under the Investment Company Act of 1940 from being deemed fiduciaries solely by virtue of a plan investing in securities offered by the investment companies under the Act.

*Section 405 (c)(1)(B) includes persons within the fiduciary definition that are designated by the named fiduciaries to carry out specified fiduciary responsibilities (not Trustee responsibilities) on behalf of the plan.

What is the Standard of Conduct?

The standard is the Prudent Expert Rule.

ERISA Section 404(a)(1) provides the guidance for what is generally known as the "Prudent Expert Rule" given its language of paragraph (B).

(a)(1) Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

  1. for the exclusive purpose of:
    • providing benefits to participants and their beneficiaries; and
    • defraying reasonable expenses of administering the plan;
  2. with the 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;
  3. by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
  4. in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter or subchapter III of this chapter.

The Bank Trust Officer managing the assets of a widow or orphan is not held to as high a standard of competency as the ERISA Plan fiduciary!

Individuals serving as fiduciaries for a plan must exercise their duties as a fully knowledgeable expert would under the same circumstances and must always serve the interests of the participants and beneficiaries first.

Fiduciaries must generally secure professional assistance to satisfy the knowledgeable expert requirement of ERISA.

Characterize the Fiduciary's Liability—

Fiduciary liability is PERSONAL liability!

ERISA Section 409(a) specifies the nature of a fiduciary's liability as follows:

Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. A fiduciary may also be removed for a violation of section 411 of this Act.*

*Section 411 prohibits individuals convicted of various offenses from serving as a fiduciary.

A fiduciary is ultimately responsible for his/her errors or omissions to the extent of having to use personal assets to restore losses and damages. In some circumstances the plan sponsor may provide some indemnification and some errors and omissions can be insured against, but generally speaking these arrangements require ultimate recourse against the individual fiduciary in order to be valid.

Is my broker a Fiduciary?

He or she might be a fiduciary, but not an investment manager.

A broker (or dealer) registered under the Securities Exchange Act of 1934 is not deemed a fiduciary by virtue of executing securities transactions on behalf of a plan as a part of its normal business activity.

And a general rule, broker/dealer firms will contend that they or their broker representatives are not fiduciaries to a Plan.

If a broker/dealer is deemed a fiduciary due to any of the circumstances referenced in Department of Labor Reg. Paragraph 2510.3-21(d)(1), ERISA does not provide any statutory relief of liability to other Plan Fiduciaries.

Statutory protection from liability is available only if investment responsibilities have been delegated to an "investment manager." Under ERISA statutes, a person registered only as a broker/dealer cannot be named as an investment manager.

    The Department of Labor Reg. Paragraph 2510.3-21(d)(1) articulates the circumstances that cause a broker/dealer to be deemed a fiduciary as follows:
  • 1. The broker/dealer is affiliated with a fiduciary of the plan.
  • 2. The broker/dealer exercises discretion (as opposed to receiving specific instructions from the plan fiduciaries) with respect to
    • security to be purchased or sold;
    • price range within which the security may be bought or sold;
    • execution time span (generally exceeding 5 days) for the buy or sell;
    • minimum or maximum number of shares to be traded.


Fiduciary Priorities—

What should be the Priorities for a Plan Fiduciary?

Fiduciaries have a very critical role to fulfill through their oversight of a Retirement Plan. Given the complexity of ERISA rules and regulations and the importance successful investment management has to the Plan's participants and beneficiaries, the Plan Fiduciary needs to set clear priorities in its administration of the Plan.

NWCM has identified five such Priorities. Plan Fiduciaries will rank them in different orders of importance, given the design objectives of their Plans and the demographics of the Employer's work force. Ideally, the Plan achieves all of them with the assistance of service providers who place equal importance on the following:

  1. Reduction in fiduciary liability;
  2. Access to top-performing investment management;
  3. Minimized aggravation to the HR Department's involvement with day-to-day operations;
  4. Lower Plan expenses, both for services and in funding costs; and
  5. Recognition from employees that their Employer's Retirement Plan is a great benefit.
 

The key attribute for being included as a fiduciary for a plan, other than being a Named Fiduciary, is your ability to exercise discretionary control or authority related to the investments or the administration of the plan. Can you, or do you, make judgment calls?

It is important to note that a person not normally considered a fiduciary can be deemed to be a fiduciary with respect to the exercise by that person of specific discretionary acts.