(b)lines Ask the Experts – Can Plan Sponsors Reduce Fiduciary Liability?

Michael A. Webb, vice president, Cammack Retirement Group, answers:        

You can’t eliminate it entirely, but you can certainly limit your exposure. The excellent Department of Labor brochure, Meeting Your Fiduciary Responsibilities (which, as an aside, the Experts recommend as required reading for fiduciaries such as yourself) addresses this issue directly. It states that there are several methods to limit ones fiduciary liability, as follows (language in quotation marks is quoted directly from the brochure):

1)         Document, document, document! — “One way fiduciaries can demonstrate that they have carried out their responsibilities properly is by documenting the processes used to carry out their fiduciary responsibilities.”

2)         Utilize some plan design safe harbors—

a)         Participant direction of investments under ERISA 404(c)—“Some plans, such as most 401(k) and profit sharing plans, can be set up to give participants control over the investments in their accounts and limit a fiduciary’s liability for the investment decisions made by the participants. For participants to have control, they must be given the opportunity to choose from a broad range of investment alternatives. Under Labor Department regulations, there must be at least three different investment options so that employees can diversify investments within an investment category, such as through a mutual fund, and diversify among the investment alternatives offered. In addition, participants must be given sufficient information to make informed decisions about the options offered under the plan. Participants also must be allowed to give investment instructions at least once a quarter, and perhaps more often if the investment option is volatile.”

b)         Automatic Enrollment/Automatic Investment—“Plans that automatically enroll employees can be set up to limit a fiduciary’s liability for any plan losses that are a result of automatically investing participant contributions in certain default investments. There are four types of investment alternatives for default investments as described in Labor Department regulations and an initial notice and annual notice must be provided to participants. Also, participants must have the opportunity to direct their investments to a broad range of other options, and be provided materials on these options to help them do so.”

3)         Hire service providers to handle fiduciary functions—“A fiduciary can also hire a service provider or providers to handle fiduciary functions, setting up the agreement so that the person or entity then assumes liability for those functions selected. If an employer appoints an investment manager that is a bank, insurance company, or registered investment adviser, the employer is responsible for the selection of the manager, but is not liable for the individual investment decisions of that manager.” The key here is that the entity hired must specify that it is a fiduciary and assume fiduciary liability in its contract with the plan sponsor for the fiduciary functions it performs.

However, the DOL cautions that the fiduciary liability cannot be completely outsourced to a third party, utilizing the example of the investment manager described above: “However, an employer is required to monitor the manager periodically to assure that it is handling the plan’s investments prudently and in accordance with the appointment.” Thus, when you hire a third party to perform a fiduciary function, you retain the fiduciary responsibility of monitoring the third party to make certain that the firm is doing its job.

Furthermore, even with the plan design options above, the DOL makes it clear that fiduciary responsibility remains: “However, while a fiduciary may have relief from liability for the specific investment allocations made by participants or automatic investments, the fiduciary retains the responsibility for selecting and monitoring the investment alternatives that are made available under the plan.”

Finally, fiduciaries also retain liability for certain aspects of the performance of OTHER plan fiduciaries, as follows: “A fiduciary should be aware of others who serve as fiduciaries to the same plan, because all fiduciaries have potential liability for the actions of their co-fiduciaries. 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.”

Though fiduciary liability cannot be completely eliminated, fortunately there is insurance available to protect fiduciaries from claims, as detailed in a prior Ask the Experts column. As a fiduciary, you should confirm that such specific coverage is in force to protect you.

Thank you for your question!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.