Crib notes on the pros and cons of being an ERISA fiduciary.
Inadvertently being a fiduciary of an ERISA plan can result in unexpected and unlimited liability. Conversely, intentionally becoming a fiduciary can benefit the ERISA plan administrator by customer loyalty and increased rewards. What should a service provider consider when deciding whether or not to serve as a fiduciary of an ERISA plan?
A fiduciary has a duty of utmost loyalty, putting the beneficiarys interests ahead of their personal or business interests. Under ERISA, the notion of fiduciary is precisely defined and includes anyone who (with respect to an ERISA plan):
* exercises any discretionary authority or control respecting management of such plan or exercises any authority … or control respecting management or disposition of its assets;
* renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any responsibility to do so; or
* has any discretionary authority or responsibility in the administration of such plan.
If you “manage” the plan or its assets, investments, or administration, you are an ERISA fiduciary and bound by the duties. Among other things, as a fiduciary you cannot enter into transactions prohibited under Section 4975 of the Internal Revenue Code, which bans direct and indirect self-dealing-subject to Treasury regulations providing exemptions for transactions that are administratively feasible and are in the interest of the plan, its participants, and beneficiaries. Limited statutory exemptions also exist for transactions that are “reasonable” or not for more than “adequate consideration” by others that act as fiduciaries.
ERISA fiduciaries enjoy many advantages that go with the burden of the fiduciary duty. Under the pending Pension Protection Act of 2005, effective January 1, 2006, fiduciary advisers can charge a fee for advice to the plan, a participant, or beneficiary in connection with any sale, acquisition, or holding of a property for purposes of investment of plan assets-where the investment is subject to the direction of participants or beneficiaries and the investment conforms to Treasury regulations. New SEC-compliant procedures would apply, and the compensation would need to be “reasonable,” but the freedom to advise for a fee is a powerful incentive for an investment adviser to become a fiduciary. Such advisers would need to be registered or regulated in relation to banking, insurance, or broker-dealer operations. The added risk and burden also make the sales pitch easier, as the service providers risk is aligned with its customer’s risk.
Not To Be
When is an administrator not an ERISA fiduciary? In a May 2005 Coldesina v. Simper decision, a federal appeals court distinguished between having discretionary
authority or control (as a fiduciary) and having no such authority or control (as a non-fiduciary). It found no such discretion or control where administrative functions are:
* merely nondiscretionary or ministerial functions not requiring individual decision-making, such as clerical services, or
* functions that might otherwise require discretion but that are covered by the ERISA plans policies and procedure.
Inadvertence will get you into hot water. In the Coldesina decision, an accountant for a profit-sharing plan under ERISA was found to be an ERISA fiduciary merely by having the authority to sign checks for the plan. As such, the accountant could be sued for writing unauthorized checks to the plans investment adviser.
For clarity, outsourcing service providers and their clients should agree in advance on the control that the parties intend to delegate to the provider. In the statement of work, the tasks should be identified so that the responsibility for adoption of procedures, and the decision when and whether to make changes, remains solely with the plan sponsor or administrator. In turn, there may be a supplemental task line under which the plan sponsor or administrator can call upon the employer to comply with such procedures in a similar fashion. Agreed procedures should be established so that any recommendations by the provider for amending either the plan or the terms of the plan participants’ rights would require an explicit decision by the plan fiduciary.
In that way, the decision “to be or not to be” will be mutually agreed with a clear path for defined roles and responsibilities as to activities of a plans fiduciaries.