Spooked by the Specter of Fiduciary Liability?
The mere whisper of the word “fiduciary” is enough to send shivers down the spines of many retirement plan sponsors—and not without good reason. By definition, plan sponsors are plan fiduciaries. And recently, the employee benefits arena has been filled with court cases in which sponsors have faced harsh consequences for not understanding and fulfilling their fiduciary responsibilities to their plans.
Understanding Your Fiduciary Responsibilities
Pension law (ERISA) assigns plan fiduciaries specific responsibilities with regard to plan investments and administration. In addition to exposing you to fiduciary liability, how you execute these duties can have a significant impact on how well your plan participants achieve their retirement goals.
Topping the duties are loyalty and prudence, followed by the more mechanical duties of diversification and adherence to the plan documents. In the case of loyalty, ERISA directs fiduciaries to discharge their duties with respect to a plan solely in the interest of the plan participants and beneficiaries for the exclusive purpose of (1) providing benefits to participants and their beneficiaries and (2) defraying reasonable expenses of administering the plan.
Fiduciaries who breach their responsibilities are personally liable for restoring the plan to the condition it was in prior to the breach, including restoring any monetary losses and returning any profits made through the use of plan assets. A fiduciary also may be subject to monetary penalties for violating certain ERISA and IRC prohibited transaction rules.
The Delegation Misconception
Fortunately, ERISA allows plan sponsors and other plan fiduciaries to delegate certain fiduciary responsibilities. In fact, ERISA encourages sponsors to seek professional help. As a result, most sponsors hire an institutional trustee for their plans—after which many breathe a sigh of relief believing that they have also delegated their fiduciary responsibility, as it relates to plan assets, to the designated trustee.
Most often, this isn’t true. There are two types of institutional trustees, directed trustees and discretionary trustees. Very few financial institutions serve as discretionary trustees. A directed trustee holds the plan assets in safekeeping and acts as directed by the plan sponsor. Typically, a directed trustee does not advise the other plan fiduciaries regarding the plan’s assets. Nor does a directed trustee generally have the discretion to make investment decisions. Directed trustees often refuse fiduciary responsibility, leaving the sponsor on its own.
These limitations have led the U.S. Department of Labor (DOL) to take the position that a named fiduciary, such as a plan sponsor, may not be relieved of any of its potential fiduciary liability under ERISA simply by appointing a directed trustee.