When someone has been entrusted with much, even more will be required. Luke 12:48
You may be a fiduciary and not know it
Do you consider yourself an investment fiduciary with the responsibility and fiduciary liability attached? Anyone with discretionary duties for a defined contribution plan such as
- Administrative committee, Board of Directors, law firm partner
- Anyone who performs a fiduciary function
- Maybe you
The US Department of Labor published Meeting Your Fiduciary Responsibilities to clarify. Chief among fiduciaries responsibilities is to act solely in participants’ interest. There are many duties involved in showing your efforts in acting solely in participants’ interest. With this responsibility comes fiduciary liability.
What is the potential fiduciary liability?
Fiduciaries who do not follow the basic standards of conduct required by ERISA may be held personally liable to restore any losses to the plan, or to restore any profits they made through improper use of the plan’s assets.
A fiduciary should be aware of others who serve as fiduciaries to the same plan, since all have potential liability for the actions of others. For example, if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach or does not act to correct it, that fiduciary is liable as well.
There can be both civil and criminal penalties for fiduciary breaches.
How can fiduciary liability be reduced?
- Compliance with ERISA Section 404(c)
- Investment Policy Statement
- Retain investment experts
- Obtain a fidelity bond
ERISA Section 404(c) provides a set of voluntary guidelines that a plan sponsor can follow to effectively transfer the potential fiduciary liability related to investment decision-making responsibilities to participants in the plan. Essentially, Section 404(c) requires that participants must be able to choose from a “broad range” of investment options and be able to “exercise control” over their accounts.
The “broad range” has three considerations. First, participants should be offered an “opportunity” to affect the level of return and degree of risk to which their accounts are subject. Second, participants should be offered a “choice” from at least three investment alternatives that are diversified and are materially different in terms of risk and return characteristics. Third, participants need to be able to “diversify” so that they can manage the risk of large losses.
“Exercising control” means that participants have the opportunity to give investment instructions at least one each calendar quarter. For example, they should be able to transfer among their investment options at least quarterly.
Overall, Section 404(c) requires that participants be given sufficient information to make informed decisions about the options available in the plan.
Another way to manage fiduciary liability is to have an investment policy statement (“an IPS”). An IPS provides a road map of how investment decisions are made, how investments are monitored and replaced, and the reasons why actions are taken.
My favorite is when a fiduciary hires a service provider or providers to handle certain functions. Few providers that handle functions take on fiduciary liability. You need to look for an ERISA 3(21) investment advisor, ERISA 3(38) investment manager, ERISA 3(16) administrator, discretionary trustee (not directed), or independent fiduciary. The law always requires that they be prudently selected and monitored. You should seek ERISA counsel to clarify contracts.
ERSIA requires that those who handle plan investments or other plan property generally must be covered by a fidelity bond. You must have a bond of at least 10% of assets, capping at $5,000,000 or $500,000 bond. This type of insurance protects the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond.
A final key step to take in managing fiduciary liability is to document all actions taken with respect to investments and all other plan operations. Having a written record of what was considered in reaching a decision or implementing a policy can be invaluable in demonstrating good faith on the part of the plan sponsor.
Let us know how many of these fiduciary liability measures you have in place.
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI.