Most plan sponsors and advisor co-fiduciaries realize that their actions subject them and the company to liability if they violate the law but what happens when they learn that someone else is breaching their fiduciary responsibility or is about to commit a prohibited transaction? That question was posed to Fred Reish and Joan Neri, ERISA attorneys at Drinker, Biddle and Reath, by a financial advisor acting as a co-fiduciary which might also apply to plan sponsor (ERISA fiduciaries). .
According to the legal experts, the advisor would be liable and subject to damages if they knowingly participated in the illegal activity, concealed the actions or were aware of the issues and didn’t try to stop it. ERISA fiduciaries have a duty of loyalty which means they have a duty to act. They would be well advised to notify other plan fiduciaries or the DOL and take action.
At a TPSU program, a plan sponsor raised a similar issue. The Sponsor’s CEO was friends with someone managing a mutual fund and the CEO tried to include the fund in the plan’s investment lineup although it would clearly not meet the criteria under the Investment policy statement (IPS). The plan sponsor asked the TPSU Adjunct Lecturer what they should do. The advisor suggested that, along with the advisor, they should approach the CEO and try to talk the executive out of what would clearly be a breach of fiduciary responsibility subjecting the company, the plan fiduciaries and the CEO to liability and damages.
Advisors in this difficult situation can resign and report the company to the DOL to protect themselves losing one client. But what about employees acting as fiduciaries? Should they risk losing their job? At worst, if the CEO forced the committee to use her friend’s mutual fund, the employee could resign from the committee, stop acting as a plan fiduciary and send a note to the file.
But is that enough if, as the attorneys suggested to the advisor who posed the question:
“You need to take some action. If you don’t try to remedy the breach, you could be sued along with the fiduciary who engaged in it, even if it involved responsibilities beyond the scope of your services.”
Ouch!
