Step 5: Fiduciary Support
Co-Fiduciary Responsibility and Liability
Even where a fiduciary has not directly caused a plan to suffer a loss, liability may still lie for actions the fiduciary failed to take. Under Section 405 (a) of ERISA, a plan fiduciary is liable for another fiduciary’s breach of duty with respect to the same plan if he or she:
- Participates knowingly in, or knowingly undertakes to conceal, an act or omission to be a breach of fiduciary responsibility
- By failing to fulfill his or her own fiduciary responsibilities, has enabled the other fiduciary to commit such breach or
- Has knowledge of a breach by such other fiduciary and fails to make reasonable efforts under the circumstances to remedy the breach.
ERISA also makes clear that where assets are held by two or more trustees, each fiduciary shall use reasonable care to prevent a co-trustee from committing a breach, and shall jointly manage and control plan assets unless specific duties have been allocated among them. In the absence of conduct that falls within Section 405(a), however, the liability of a fiduciary who is not a “named fiduciary” is generally limited to the functions he or she performs with respect to the plan, and he or she will not be personally liable for all phases of the management and administration of the plan. In fact, some courts have held that a fiduciary may bring suit for indemnification against a co-fiduciary predicated on the latter’s violation of the terms of the plan.
Delegation of Fiduciary Responsibilities
As already discussed, ERISA measures a fiduciary’s conduct against that of an objective “prudent expert.” Not all fiduciaries, however, can be experts in each and every endeavor associated with employee benefit plans. ERISA recognizes this limitation and grants fiduciaries broad power to delegate their responsibilities accordingly, thus, in addition to being able to delegate responsibility for plan administration and benefits determination; fiduciaries can delegate investment management authority.
Source: The excerpt below was obtained from 2002 ASPA Annual Conference, The presentation was titles Top 10 Countdown of 401 (k) Fiduciary Problems and presented by the prominent ERISA attorneys Fred Reish & Bruce Ashton of Reish Luftman McDaniel & Reicher, 1755 Wilshire Boulevard 110th floor Los Angeles, CA
1. Determine if you are a Fiduciary of Your Company’s Retirement Plan
a. A fiduciary is defined as any person(s) who exercises discretionary authority or control over the management of the Plan assets. This may include officers, directors, human resource/payroll personnel, employees of the company, as well as the named trustees of the plan.
b. A fiduciary can also be any person who renders ongoing investment advice for a fee or other compensation.
2. Know What Your Fiduciary Responsibilities are Under ERISA
a. Loyalty – Duty to act with complete and undivided loyalty to the beneficiaries as a prudent expert, to the exclusion of interests of all other parties, including the trust’s own interests.
b. Diversify – Ensure that the plan offers a diversified investment menu to allow the participants to minimize the risk of long-term losses. If the plan is not diversified, the burden of proof falls onto the fiduciary to prove why it was not prudent to diversify.
c. Incur Only Reasonable Costs – Know what you are paying for with regard to total plan expenses and how these costs compare to the market for reasonableness. You do not need to have the absolute lowest cost plan, but you do need to know what you are paying for and how those costs compare to the market annually.
d. Monitoring Investments and Service Providers – Implement an ongoing program for measuring the results of your plan’s investments for consistency of style, performance, changes in management, fraudulent activity, also evaluate service providers performance.
e. Avoid Prohibited Transactions – A plan’s fiduciary shall not cause the plan to engage in a transaction if he/she knows that the transaction constitutes a direct or indirect:i. sale, exchange, or leasing of any property between the plan and a party in interest
ii. lending of money or other extension of credit between the plan and a party in interest
iii. furnishing of goods, services, or facilities between the plan and a party in interest
iv. transfer to, or use by, or for the benefit of a party in interest
v. cause of a plan to acquire and to retain employer securities or employer real property in violation of ERISA
3. Become Procedurally & Substantively Prudent
a. Develop and maintain a Fiduciary Audit File to document the process you use to manage the plan including the following:
i. Plan Documents
ii. Government/Regulatory Requirements and Communications
iii. Journals and Ledgers
iv. Section 404(c) Compliance
v. ERISA Fidelity Bond
vi. Participant Communication Documents
vii. Investment Policy Statements
viii. Third Party Service Providers
ix. Plan Procedures and Minutes of All Meetings
4. Don’t Assume Compliance with Section 404(c)
a. ERISA section 404(c) provides that if a retirement plan with individual participant accounts allows the participants to exercise control over the investment of their account assets, and all provisions of 404(c) are met by the plan sponsor, then the plan sponsor who follows the participants’ investment directions will be relieved of liability for any of the participants’ resulting losses.
b. Complying with Section 404(c) is an ongoing process and requires that the plan participants exercise control over their accounts. They must be provided enough information about the plan and investment alternatives to make informed investment decisions. Items that must be provided to participants include:i. Explanation that the plan is intended to comply with ERISA section 404(c) and to generally relieve the fiduciary of liability for losses resulting from participants’ investment decisions
ii. Description of the investment alternatives including a general description of the investment objectives and risk/return characteristics.
iii. Identification of all investment managers
iv. Explanation of the circumstances under which participants may give investment instructions and any limitations placed by the plan
v. A description of any transaction fees or expenses charged to the participants’ accounts
vi. Name, address, and phone number of the fiduciary responsible for providing information requests relative to the plan
vii. Copy of the most recent prospectus provided immediately prior to or following a participant’s initial investment in a mutual fund or security
viii. Materials relative to the exercise of voting, tender, or similar rights to the extent the rights are passed through to plan participants
5. Develop a Written Investment Policy Statement. - the IPS should include the following sections:
a. Evaluation of the specific needs of the plan and its participants
b. Investment objectives and goals of the plan
c. Definition of duties and responsibilities of all parties involved (also referred to as Fiduciary Committee Charters)
d. Defined due diligence criteria for selecting investment options for the plan
e. Classes and styles of investments authorized; restrictions on investments
f. Standards and benchmarks of investment performance to which the 401(k) plan assets are compared
g. Policy and procedures related to the hiring, monitoring, and replacement of investment managers
h. Procedures for monitoring and controlling investment expenses
6. Understand Your Liabilities Under ERISA
a. Total liability cannot be delegated away – but it can be shared
b. Penalties include plan’s lost profits plus 20%, civil actions from the participants, and possible criminal actions
c. Liability under ERISA includes your personalassets…including your home
Steps to Minimize Fiduciary Liability
1) Understand your Fiduciary Responsibilities under ERISA
Act with Prudence
Monitor and Benchmark Regularly – consider employing an objective specialist to assist with evaluating investments, service providers, and plan expenses Avoid Prohibited transactions Document! Document! Document!
Liability is not necessarily measured by the results, but by whether a prudent process and prudent practices were followed as evidenced by the documents.
2) Seek Compliance with and protection under ERISA 404(c)
3) Hire Competent objective professionals/organizations experienced with ERISA assets including:
An Institutional Investment Consultant (typically a “distribution” allowance (12b1 fee, etc.) exists in most investments & retirement plans, which a consultant can receive at no added cost to the Plan or its Participants. A Benchmarking/Search Service provider – frequently paid by the plans Investment Consultant. An ERISA attorney,
A nationally-recognized leading and fully Bundled Retirement Plan Record-keeper
4) Purchase Fiduciary Liability Insurance - in an appropriate amount, verify a “without recourse endorsement.”