A named fiduciary is someone specifically named in the plan document or appointed by the plan sponsor as being responsible for operating the plan. A trust company and/or an officer of the company specifically named in the plan document is considered to be a named fiduciary.
A functional fiduciary is someone who, based on job duties or responsibilities with respect to the plan, acts in a fiduciary capacity. A fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) is any person who exercises discretionary authority or control over the plan’s management and the management or disposition of the plan’s assets, renders investment advice for a fee or other compensation with respect to plan funds or property, and has discretionary authority or responsibility in the plan’s administration. Individuals serving on investment committees, selecting service providers to a plan, and/or having influence, discretionary authority or control over a plan are typically considered to be functional fiduciaries.
ERISA requires that all plan fiduciaries adhere to a very high standard of care, skill, prudence and due diligence in performing their responsibilities. According to ERISA §409, a fiduciary is personally liable to the plan for any losses resulting from a breach, and would also be required to restore to the plan any profits the fiduciary may have made through use of the assets of the plan, and may be subject to other equitable or remedial relief as the court deems appropriate, including the removal of the fiduciary. ERISA §502(l) goes on to state that the Department of Labor (DOL) can also assess a civil penalty in the amount of 20 percent of the amount recovered in a settlement with the DOL or awarded in a civil suit against the fiduciary who breached his or her duty or any person who knowingly participated in a breach.
Fiduciary responsibility carries personal liability and there is no “corporate veil,” or corporate protection, for fiduciaries. There could also be criminal penalties, including imprisonment. A 2008 Supreme Court decision, LaRue v. DeWolff, Boberg & Associates, Inc., et al., permits individual participants to sue plan sponsors for fiduciary breaches. With this decision, attorneys representing individual participants who believe fiduciary breaches have occurred see hefty “paydays” since U.S. 401(k) assets total over $3 trillion.
How to Mitigate Your Fiduciary Risk
Now that you are aware of your responsibilities to the plan, its participants and beneficiaries, including the related personal liability, you should take timely and appropriate steps to mitigate your risk, which may include:
- Act solely in the best interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.
- Carry out your duties prudently.
- Understand and follow the terms of the plan document (unless it is inconsistent with ERISA).
- Select and monitor service providers actively.
- Develop an investment policy and ensure it is followed.
- Diversify plan investments.
- Monitor investment performance periodically.
- Compile and evaluate all fees and compensation, both direct and indirect, that are paid related to the plan.
- Pay only reasonable plan expenses.
- Engage specialists when necessary.
- Document all decisions made regarding the plan.
Recent Regulatory Developments
In October 2010, the DOL proposed a rule to broaden the definition of a fiduciary. The consequences of the broader definition would be to encompass a larger group of individuals who would be defined as fiduciaries. The proposed change was the subject of much debate. In late September 2011, the DOL announced that it withdrew the proposed rule and would eventually re-propose the rule. This comes after requests from the public and Congress to allow an opportunity for more input on the rule.
It is expected that the revised portions of the rule will clarify the role of those providing investment advice and will be limited to individualized advice directed to specific parties. It is also anticipated that it will address the applicability of the rule to arm’s length commercial transactions along with concerns about the impact of exemptions on the current fee practices of brokers and advisers. In addition, the revamped rule is expected to focus on the continued applicability of exemptions that allow brokers to receive commissions related to mutual funds, stocks and insurance products.
The DOL will continue to coordinate closely with the Securities and Exchange Commission, Treasury Department, Internal Revenue Service (IRS) and the Commodities Futures Trading Commission to ensure that the revised rule is in sync with other ongoing rulemaking while upholding the separate federal protections that ERISA established for plans and plan participants. The new proposed rule is expected to be issued in early 2012.
For more information on employee benefit plan audits, please leave a comment below, or contact Dani Gisondo at 440-449-6800.
Information courtesy of BDO.