Tax qualified retirement plans are required to hold employer and employee contributions in an irrevocable trust, which is separate from the employer’s funds. ERISA, which governs these programs, creates various types of legal liability for a plan’s fiduciaries. Department of Labor penalties and litigation from plan participants can arise, and can be brought against an individual fiduciary. The issue of who is or is not a fiduciary is not determined solely by a person’s title.
ERISA’s definition of a fiduciary
Fiduciary status in ERISA arises in one of two ways.
- First, a person can be named as a fiduciary expressly in the plan document.
- Secondly, a person can be deemed a fiduciary if he or she (1) exercises any discretionary authority or control regarding plan management or investment management, (2) renders investment advice for compensation, or 3) has discretionary authority or responsibility relating to plan administration.
Said another way, fiduciary status can be obtained through the functions that a person performs, even though that person may not have the title of ‘trustee.’
There has been a fair amount of litigation and rulings from the Department of Labor concerning the fiduciary status of a person performing certain types of services for a qualified plan. Here are a few examples of duties that may or may not lead to fiduciary status:
- Ministerial duties (such as recordkeeping, transmitting contributions, IRS filings) does not lead to fiduciary status
- Outside professional providing professional services (for example, attorney, accountant) does not lead to fiduciary status unless the professional has discretionary authority over the management of the plan or its assets
- Investment firm merely executing investment orders from the plan will not be considered a fiduciary
- Corporate directors who appoint a plan’s fiduciaries will be deemed fiduciaries.
Particular concern for investment advisors
However, investment advisors find themselves in an unusual situation. Many investment advisors would claim that they are not fiduciaries because they provide investment advice but either do not have authority to make investments on behalf of the plan (a different plan fiduciary has that authority) or the advice is not tailored directly to the plan. There have been a number of cases in which the investment advisor was held to be a fiduciary because the customer routinely followed the provided advice and did not seek other advice.
This issue is complicated by the fact that the DOL is preparing to enforce additional disclosure regulations regarding investment fees charged to qualified retirement plans. An investment advisor who claims to be providing very limited services to the plan in order to avoid treatment as a fiduciary could have a difficult time justifying the fees charged to the plan—particularly because those fees will be disclosed to the participants in participant directed plans (such as 401(k) programs) beginning in 2012. Additionally, an investment advisor who wants to provide individualized advice to a participant in a participant directed plan will need to follow additional rules to avoid his/her fees being classified as a ‘prohibited transaction’ under ERISA, which can result in excise taxes and potential tax disqualification of the underlying plan.
Have questions related to qualified and non-qualified retirement programs? Post a comment below or contact our Compensation & Benefits Advisory Services Group at 440-449-6800.