The Fiduciary Talk

This article originally appeared in the Winter 2014 issue of Plan Consultant, and was the winning entry in ASPPA's 2013 Ed Burrows Award Call for Papers. To view a PDF version, including accompanying charts, please click here.

Employers adopting a qualified plan have a fiduciary duty to the participants and beneficiaries of the plan. That is why it is so important for the individuals operating qualified plans to understand exactly what their responsibilities are. I give “the fiduciary talk” to clearly explain these duties and to empower an employer to make well-informed decisions. This paper outlines “the talk,” which has three main parts:

• Part 1: Who is an ERISA Fiduciary?
• Part 2: The Significance of Being an ERISA Fiduciary and What to do About It
• Part 3: Structuring the Fiduciary Governance of the Plan

Part 1: Who is an ERISA Fiduciary?

The ERISA definition of a fiduciary is found in ERISA Section 3(21)(A):

A person is a fiduciary with respect to a plan to the extent:

1.       He exercises any discretionary authority or discretionary control respecting management of such plan or its assets

2.       He renders investment advice for a fee or other compensation…

3.       He has any discretionary authority or discretionary responsibility in the administration of such plan…

The fiduciary definition is a functional definition, so an individual is a fiduciary when he or she acts in one of the three manners. Being a fiduciary is not all or nothing. A person is a fiduciary in respect to the part or parts of the plan for which the individual functionally acts as a fiduciary — no more, no less.

There are three main fiduciary functions in qualified plans:

• Plan sponsor – Responsible for appointing and monitoring the Plan Administrator and Trustee.
• Plan administrator – Responsible for operating the plan in accordance with its legal documents and responsible for the overall administration of the plan.
• Trustee – Responsible for the control of plan assets.

All are fiduciaries under ERISA because they each meet the functional definition by having discretion and control over certain aspects of the plan. Also, a person can act in more than one of these roles. For example, a plan sponsor who also acts as the plan administrator is responsible for both appointing the trustee and the overall administration of the plan.

We can apply this definition to two common roles in the retirement plan industry: directed trustee versus discretionary trustee, and plan administrator versus TPA.

Directed Trustee Versus Discretionary Trustee

With two exceptions, the trustee is named in the plan document (or trust agreement) as having control over plan assets. Usually individuals of a company are named as trustees and take on that control function. This is considered a discretionary trustee.

The first exception to the rule is when a plan document (or trust agreement) requires that the trustee is subject to direction from a separate named fiduciary (like the plan sponsor). In the industry, this is considered a directed trustee. Since an ERISA fiduciary is a functional definition, a directed trustee is only a fiduciary when they act with discretion or provide investment advice for compensation. If the directed trustee does not act in either of these fashions, then he or she is not acting as an ERISA fiduciary.

The second exception to the rule is that a trustee can hire an investment manager — a bank, insurance company or registered investment advisor — to have control over some or all of the plan assets. The investment manager would then be the fiduciary responsible for managing that portion of the plan. The trustee (or responsible fiduciary) hiring the investment manager would be responsible for monitoring and overseeing the investment manager for that portion of the plan.

Plan Administrator Versus Third Party Administrator:

Many qualified plan hire firms which act as third party administrators (TPAs) to ensure that the qualified plan meets various compliance and accounting requirements. The ways in which the typical relationship breaks out the plan operation duties between the plan administrator and TPA are illustrated in Fig. 1.

Fig. 1 Division of Plan Operation Duties

The common theme is that the items on the left side of the table include discretion and control, while the items on the right are process-oriented in nature. For example, it takes specific technical skill to perform an ADP/ACP test to achieve the best outcome for the plan participants, but there is no discretion in actually running the test.

As we apply the functional definition to these two roles, we see that the plan administrator meets the functional definition of an ERISA fiduciary while the TPA probably does not.

Part 2: The Significance of Being a Fiduciary and What to do About It

According to the Department of Labor’s “Meeting Your Fiduciary Responsibilities” publication, fiduciaries are responsible for:

• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
• Carrying out their duties prudently
• Following the plan documents (unless inconsistent with ERISA)
• Diversifying plan investments
• Paying only reasonable expenses

Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.

Certain transactions involving the plan are prohibited. The plan cannot enter into transactions with plan fiduciaries, family members of plan fiduciaries and other parties that may cause a conflict of interest unless there is an exemption in ERISA or granted by the Department of Labor. For that reason, plan fiduciaries must carefully review what types of transactions take place within the plan and who is involved in the transactions.

A sound way to meet the five requirements is to follow a documented process in decision making and act with expertise in both operating the plan and managing plan assets. Lacking expertise or a process, the fiduciaries can hire a knowledgeable expert to help. Here are three ways a fiduciary can hire help:

• Hire a non-fiduciary consultant to help educate current fiduciaries and help develop processes
• Hire a fiduciary consultant who acts as a fiduciary to the plan along with the current fiduciaries when the consultant functionally takes on fiduciary responsibilities
• Outsource fiduciary responsibility to a professional fiduciary

For example, if the plan sponsor hires out an outside fiduciary to act as plan administrator, the plan sponsor will still be responsible for at least monitoring and prudently hiring the plan administrator. In reality, the breakdown of roles may be distributed as illustrated in Fig. 2.

Fig. 2

Plan Sponsors’ and Outsourced Plan Administrators’ Roles

All three ways are means to manage the fiduciary responsibilities of the plan. The best way will depend on the particular circumstances of the employer and the complexity and size of the plan.

Part 3: Structuring the Fiduciary Governance of the Plan

Once the plan sponsor understands the basics, the current fiduciary governance structure of their plan is illustrated. For a new plan, I draw a blank chart, using a three-line box format. An example is provided in Fig. 3, which is attached.

There are countless ways this can look. The important thing is that once you understand Parts 1 and 2, you can always draw out the governance structure of a plan no matter what it looks like. Once it is drawn out, the plan sponsor can see what they are responsible for and the discussion can begin on who should be responsible for what, where help should be hired and which functions should be outsourced.

Once the overall governance structure is decided, particular duties and responsibilities can be discussed. Fig. 4 (attached) provides two examples of how investment decisions can be made in a plan.

Conclusion

Once the employer understands the basics of ERISA fiduciaries, they are able to make informed decisions to structure the fiduciary governance of their plans. Naturally, plans will run better when all parties clearly understand what their responsibilities are.

Jake Linney, QPA, QPFC, ERPA, is part of the Solutions Center at Pentegra Retirement Services, Inc. He designs qualified plans and consults with clients on a variety of plan topics. In addition, Jake is an advocate for pension education and has led education programs ranging from retirement plan fundamentals to advanced consulting practices.