The burden of maintaining strict compliance with this legislation falls to anyone who meets ERISA’s definition of a “fiduciary” as follows:
- Named Fiduciaries: One who has any discretionary authority over the operation and administration of the plan, including the plan sponsor. These individuals must be named in the plan document.
- Functional Fiduciaries. One who has any discretionary control over the plan and/or its assets, or who gives investment advice for compensation. These individuals need not be named in the plan document.
Individuals who perform certain duties relating to a plan, however, are not considered fiduciaries. These duties include evaluating plans, recordkeeping, processing claims, calculating benefits, or amending a plan to comply with newly enacted legislation.
In accordance with ERISA Section 404(c) fiduciaries may be held personally liable for a plan’s losses resulting from failure to comply with these standards:
- Loyalty – Act with complete, undivided loyalty to the plan beneficiaries to the exclusion of the interests of all other parties.
- Diversification – Ensure the plan offers diversified investment options to enable participants to minimize the risk of long-term losses. In the event the plan is not so diversified, the burden of proof falls to the fiduciary to prove why it was not prudent to diversify.
- Costs – Document that the cost to operate the plan is “reasonable” compared to the market.
- Investments – Monitor the plan’s independent investment managers, including for consistency of style, performance against their benchmarks, and significant changes in management.
- Transactions – Avoid engaging in the sale, exchange, or leasing of property, or in a transaction resulting in the acquisition or retention of employer securities or real property with a party in interest. Do not lend money, extend credit or furnish goods, services, or facilities to such a party.
ERISA 404(c)/Minimizing Fiduciary Liability
Under ERISA, fiduciaries are personally liable if they fail to protect the financial interests of plan participants, and this liability extends to a fiduciary’s real estate holdings and other personal assets. In such instances, fiduciaries also face exposure to participants’ civil actions, and possible criminal actions.
However, when a plan allows participants to exercise meaningful, independent control over the investment of their assets, and the participants “actively” exercise such control, fiduciaries implementing the participants’ investment directions are relieved of liability for any losses if they are in compliance with ERISA Section 404(c).
To earn this exemption, fiduciaries must comply with 404(c) requirements for performing ongoing oversight of the investment selection, the plan administration, and the plan and investment disclosures. In addition, fiduciaries must be able to demonstrate that they are properly discharging these responsibilities.
It is important to note that fiduciaries are not relieved of their liability under Section 404(c) when losses result from imprudent investment decisions.
(Although complying with ERISA 404(c) requirements is voluntary, such compliance is highly advised for most plan fiduciaries).
Prudent Expert Rule
ERISA requires fiduciaries to discharge their responsibilities "…with the (same) care, skill, prudence, and diligence…” a person familiar with such responsibilities would exercise under similar circumstances.
In making decisions about investment options offered to plan participants, the standard to which fiduciaries are held often is referred to as the “Prudent Expert Rule” because their decisions are measured against the decisions an experienced investor would make when assuming the same responsibility.
A good faith effort on the part of the plan fiduciary is not sufficient. Rather, to rise to this standard, fiduciaries must engage in a prudent process to gather and analyze all of the information relevant to the proposed investment option before making a decision.
Therefore, when fiduciaries lack expertise in this area (or in any area pertaining to the proper administration of the plan), they should consider seeking the advice of a professional with the requisite expertise.
Delegating Fiduciary Responsibilities
When responsibilities are delegated to an investment adviser or to another professional, fiduciaries must:
- Exercise prudent, reasonable, informed judgments;
- Maintain a due diligence file to document the information reviewed and the decisions made regarding the process underlying the delegation of responsibility;
- Evaluate and monitor the ongoing performance of these other fiduciaries and/or service providers;
- Schedule ongoing training about the roles, responsibilities and expectations of all parties involved with the plan.
ERISA 3(21) Fiduciaries
When delegating responsibilities to an investment adviser, plan sponsors have the option of engaging an individual who will agree to assume the liabilities associated with acting as a functional fiduciary in accordance with ERISA Section 3(21).
As defined by ERISA, a “3(21) fiduciary” is an investment adviser who is compensated for rendering investment advice and/or who assumes responsibility for rendering investment advice.
Although 3(21) advisers share liability with other plan fiduciaries, they do not exercise discretion with regard to plan investments. They make recommendations but ultimately defer to the plan sponsor or the investment committee in the final decision making process.
About The Author
Steve Bogner is a director with Treasury Partners, and is responsible for the firm’s retirement planning services. His areas of expertise include control/restricted stock, defined contribution/benefit plans, life insurance/annuities, and estate planning. He is a Certified 401(k) Professional (C(k)P), and holds Series 7, 31, and 63 securities licenses, a Series 65 investment adviser license, and is life and health insurance licensed.
About Treasury Partners
Headquartered in New York City, Treasury Partners is a team of 19 investment, portfolio management, analytical, and administrative professionals. Treasury Partners delivers an array of wealth management, corporate cash management, and retirement planning services.
Treasury Partners is registered with HighTower Securities, LLC, member FINRA, MSRB, and SIPC, and & HighTower Advisers, LLC, a registered investment adviser with the SEC.
About HighTower Advisors
HighTower is a financial services firm offering a platform that blends objective wealth management advice with innovative technology.
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.
Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.
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