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Fiduciary Liability – Can You Hire it Away? Ask The Lawyer

FIDUCIARY LIABILITY – CAN YOU HIRE IT AWAY? – Ask The Lawyer by Carol Buckmann

“I really don’t have the time to manage my 401k plan. Can I hire someone to take it over for me and delegate all my fiduciary liability?”

The client who asked me this had a full plate running the business.  My response was that it isn’t really possible for a plan sponsor to delegate away all fiduciary responsibility, though there are several options to limit the exposure.  Just hiring most TPAs isn’t one of them, since TPAs often refuse to accept fiduciary responsibility in their service agreements.

However, you can—–

  • Hire a Co-Fiduciary Investment Advisor. A fiduciary investment advisor (known as an ERISA 3(21) fiduciary) gives advice about what many plan sponsors consider the scariest part of plan management-selecting and reviewing investments and reviewing fees. However, the advisor doesn’t make decisions, so the plan fiduciaries who do retain co-fiduciary responsibility for them and also for prudently selecting the advisor and monitoring the advisor’s overall performance.
  • Hire a Fiduciary Investment Manager. An investment manager (known as an ERISA 3(38) fiduciary) assumes fiduciary responsibility for making investment decisions. You can hire managers to manage a portfolio or just to pick from among the investment options available from your vendor. You can hire managers directly or through bank collective funds and insurance company accounts. If the manager is a qualifying bank, registered investment adviser or insurance company and acknowledges fiduciary status in writing, the manager provides a special type of protection under ERISA.  Plan fiduciaries are responsible for prudently hiring the manager and monitoring the manager’s overall performance, but not for the manager’s day-to-day investment decisions.
  • Hire a Bank Trustee. Don’t be your plan’s trustee. The Department of Labor says that even a custodial trustee has some fiduciary responsibilities, so you could be on the hook even if the plan has managed investments.  A professional bank trustee can be either a custodial trustee or manage assets for you.
  • Hire a Third Party Administrator. The Company will be the ERISA plan administrator (responsible for running the plan properly and filing all required reports) unless a third party administrator (known as an ERISA 3(16) fiduciary) has been appointed as a Named Fiduciary for administration.  A good administrator can take over compliance and reporting but, again, the appointing fiduciaries must prudently appoint the administrator and monitor the administrator’s overall performance.
  • Consider a Multiple Employer Plan (MEP). This option is the most extreme because it transfers control over the plan, but potentially provides the most protection. Companies can join with other employers to pool their assets and participate in a plan run by a third party sponsor who either is or has engaged a 3(16) fiduciary. While providing a real transfer of fiduciary responsibility, these arrangements currently have downsides as well.  If there is no common bond among employers, they are treated for some purposes as maintaining separate plans.  Each employer may have to file its own form 5500 and a qualification problem with one employer’s plan can taint the entire arrangement. It is often difficult to terminate a company’s participation in a MEP.  This may require a spinoff to a new plan.  Finally, the employer still has some responsibilities under a MEP and may have some residual fiduciary responsibilities.

There is no ideal way to negotiate fiduciary responsibility away. Plan fiduciaries hiring third parties need to understand the responsibilities they are and are not transferring, and to make sure the fees being paid for the services provided are reasonable.

Carol Buckmann is a founding partner at Cohen & Buckmann PC, and has practiced at major law firms specializing in the areas of employee benefits and executive compensation for over 30 years. Carol frequently blogs, writes articles and is quoted in the media about current employee benefit issues.


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