What Does It Mean to Be a Fiduciary?

Fiduciary duty is at the root of all that plan sponsors must monitor when operating a Employee Retirement Income Security Act-governed retirement plan.

Who serves as a fiduciary and what it means to be one are determinations that sit at the heart of fulfilling those duties and operating a plan in compliance with the law.

Federal courts have described fiduciary duties as “essentially the highest known to law,” says Matthew Eickman, a managing partner in the Fiduciary Law Center. “There’s an understanding that one who serves as a fiduciary has a heightened responsibility to put other people’s interests first, above and beyond any other type of responsibility we might have.”

Who Qualifies?

Brad Huss, a director at employee benefits law firm Trucker Huss, told PLANSPONSOR during a livestream in February that a person is deemed a fiduciary under Section 3(21) of ERISA if they:

• “Exercise any discretionary authority or discretionary control respecting management of the plan;
• Exercise any authority or control respecting management or disposition of plan assets;
• Render investment advice for a fee or other compensation, direct or indirect, with respect to any plan assets, or ha[ve] any authority or responsibility to do so; or
• Have any discretionary authority or responsibility in the administration of the plan.”

While someone may be an “inherent” fiduciary, by serving as the trustee of a plan, as an ERISA-defined plan “administrator” or as an investment or administrative committee member, they “can be a fiduciary, whether [they] have a fancy title or not,” Huss explained.

That fiduciary status is not just a label, says Michael Francis, president of investment adviser firm Francis LLC.

“The definition, which has evolved over the last 50 years, is largely a functional one, not a matter of title or distinction,” Francis says. “Basically, ERISA says anybody who has discretionary control or authority to change a qualified retirement plan—or its assets—will be considered a fiduciary.”

Tim Byrd said that when he first joined the North Carolina State Employees’ Credit Union as its vice president of retirement benefits and education, the first learning curve he encountered came after he was named a fiduciary of the firm’s plan. He had to quickly learn the responsibilities of the job.

“It’s a big role to be the named fiduciary along with the employer sponsor,” Byrd says. “You then need help from team members to do the day-to-day.”

While a plan governing board is typically composed of people acting as fiduciaries, Francis says boards commonly delegate many of their responsibilities to a committee. The committee includes a subset of individuals from the board, a selection of individuals from the firm, or some combination of those groups. Anyone who votes on a committee is sure to be a fiduciary, Francis says.

Different Roles

Eickman says he would characterize fiduciaries as falling into three distinct categories: (1) the “quarterback” of the plan, who starts with all fiduciary responsibility at the outset; (2) the investment fiduciary; and (3) the administrative fiduciary.

While the fiduciary likened to a quarterback can outsource responsibilities to investment and administrative fiduciaries, that first fiduciary still retains an ongoing duty to monitor service providers once selected—to ensure those providers continue to work in the best interest of the plan.

Eickman explains that the investment fiduciary is responsible for selecting the investment menu available to participants and changing those options as necessary or prudent. There are two ways a plan sponsor might utilize an investment fiduciary, according to Eickman: (1) by leveraging their advice only, which falls under Section 3(21) of ERISA; or (2) by granting them the responsibility to not only provide advice, but also to make investment decisions on behalf of the plan as a “discretionary manager fiduciary” under Section 3(38).

As an example, the North Carolina State Employees’ Credit Union currently has a 3(21) arrangement with CAPTRUST, which advises the credit union on its investment menu, according to Byrd, but the credit union must approve all decisions.

Those fulfilling administrative responsibilities that require discretion or interpretation of a plan’s terms—such as filing a Form 5500—may serve as fiduciaries as well. Eickman says it has become more common for plan sponsors to outsource at least some of the administrative duties to third-party service providers than for them to retain full responsibility.

“You want to engage others to fulfill as much of your fiduciary responsibility as possible,” Eickman tells plan sponsors, adding, “Always be aware that [you] have this ongoing responsibility to monitor those [outsourced] fiduciaries.”

Common Misconceptions

Francis says misconceptions about fiduciary duties are often “mistakes of perception.” One such mistake is the view that members of an HR team serve as fiduciaries because they help run a retirement program. However, the HR team is not necessarily exercising discretion—it may just be implementing plan decisions made by others.

In addition, Francis says many service providers are not plan fiduciaries—and the providers explicitly state that they are not—to distance themselves from heightened responsibilities and duties.

Another typical “mistake of perception” is that investment managers are fiduciaries to a retirement plan, according to Francis. Investment managers may instead have fiduciary duties to a fund’s investors under the Investment Company Act of 1940.

Kevin Walsh, a principal in Groom Law Group who advises clients on fiduciary matters, believes the biggest misconception is about what the fiduciary standard of prudence requires.

According to Section 2204 of ERISA, the duty requires a fiduciary to act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in the capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

“ERISA doesn’t let a fiduciary off the hook because they’re not sophisticated,” Walsh explains. “It requires that as a fiduciary, you either get up to speed or find someone that could help advise [you] on how to go about making that decision as an expert would.”

“It’s a best practice not to go at it alone,” said Leah Sylvester, executive partner and president of retirement plans at Shepherd Financial, during PLANSPONSOR’s Roadmap livestream event.

As part of the duty of loyalty, a fiduciary under ERISA shall “discharge their duties with respect to a plan solely in the interest of the participants and beneficiaries,” Huss said during the livestream. Walsh says fiduciaries need to act with a “single eye toward the goal for the plan.”

Advice for Plan Sponsors

Francis’ best piece of advice to a plan sponsor on fulfilling their fiduciary duties is to make sure their plan committee receives proper fiduciary training.

“They need to know the plan rules, the laws, who is a fiduciary, and who is not a fiduciary,” Francis says. He adds that a crucial regulation for fiduciaries to know, often left out of training sessions, is Section 409(a) of ERISA, which states that anyone in breach of their fiduciary duty can be personally liable to make good to the plan any losses to the plan from the breach.

“Liability is something that anyone who serves on a plan committee should be very aware of,” Francis says. “‘I didn’t know’ is not an acceptable defense under the law.’”

Walsh suggests that when hiring a service provider, it is important for a plan sponsor to understand whether the entity itself is taking on fiduciary status or simply administering decisions that the plan sponsor makes.

“Typically, it’s more expensive if you hire someone in a fiduciary capacity,” Walsh says. “For some services, you may want to have a fiduciary, but for others, it may be overkill.”