Are Your Vendors Fiduciaries? Why Does It Matter? Ask The Lawyer by Carol Buckmann
Using non-fiduciary plan providers for services or investing may cause a plan committee to assume more retirement plan risk than the plan sponsor wants to accept. Retirement plan sponsors have a large responsibility to plan participants and the sponsoring organization. We frequently hear of the responsibility that extends to plan participants and their beneficiaries, but we rarely hear of some of the additional responsibilities. Most plan sponsors – or the committees which make decisions on behalf of the plan – have a full understanding of the role of the plan vendors. What is frequently misunderstood is “in what capacity are our service providers performing their functions?” As a Plan Fiduciary, as a co-Fiduciary, as an Investment Fiduciary, as an agent or some other capacity?
Keep in mind that a directed trustee has very limited fiduciary responsibilities. Using non-fiduciary plan providers for services or investing may cause you to assume more risk than the plan sponsor wants to accept. It is not a violation, however, a plan sponsor should fully comprehend the risks. It is an unforgivable mistake for plan sponsor to blindly assume that all of a plan’s service providers are acting as fiduciaries.
“Aren’t all the people I rely on to help run my 401k plan fiduciaries?” a client asked recently when I suggested that it was important to know the status of all the plan service providers.
This is a common misconception. Plan sponsors often assume that everyone they hire to help run their plans is held to a fiduciary standard when, in fact, only some or none of them may be ERISA fiduciaries. Plan sponsors need to know whether service providers are fiduciaries because if they are not, the plan sponsor retains those fiduciary responsibilities and potential liability for fiduciary breaches.
Here is a quick guide to when your service providers are and are not ERISA fiduciaries:
Who is advising you about investments?
If your adviser or broker doesn’t acknowledge co-fiduciary status in writing, fiduciary status will be determined by what the adviser or broker does and whether a five-part test established by the DOL that looks at the adviser’s or broker’s activities is satisfied. The five-part test has gaps. For example, fiduciary advice must be given on a regular basis and with the understanding that it will be a primary basis for plan decisions. Advisers and brokers can be fiduciaries even if their agreements attempt to disclaim fiduciary responsibility. However, a fiduciary disclaimer is a warning that you are probably in for a fight if you try to sue them for breach of fiduciary responsibility based on their actions. Plan provider employees who advise you about setting up investment menus are usually not fiduciaries. A person providing only general investment education to participants is also not a fiduciary.
Who is managing plan money?
Whether a professional money manager is a fiduciary depends on the kind of account the manager manages. ERISA says that the manager of a mutual fund in which a plan invests isn’t a fiduciary. Neither is the insurance company if the plan invests in a guaranteed benefit policy backed by general account assets.
Trustees of bank collective trusts and insurers who manage insurance company separate accounts and other general account contracts are fiduciaries, as are investment managers and trustees you hire directly to manage assets. However, a purely directed trustee has very limited fiduciary responsibilities.
An ERISA attorney can help you review your investment documents to help you determine whether the manager or the manager of the ultimate investments is a fiduciary.
Who is providing recordkeeping and administrative services?
This is probably the most common source of confusion. Most major 401k providers – the Fidelitys, Vanguards and Empowers-are not acting as fiduciaries when they perform functions such draft your communications, perform non-discrimination testing and process loans and hardship distributions in accordance with non-discretionary guidelines. Vendors call the legally-required communications they send out “drafts which should be reviewed by your legal counsel.” This means that the plan sponsor is on the hook if vendor employees make mistakes which the sponsor doesn’t catch. You can hire professional fiduciaries who will assume fiduciary responsibilities if you have a “3(16) plan administrator”, though you will still have some monitoring obligations.
Protect Yourself and Investigate
Because few company fiduciaries have the necessary investment expertise, they should hire only advisers who acknowledge that they are ERISA fiduciaries to assist them in selecting and monitoring the funds in their investment menus. There is nothing wrong with using non-fiduciary plan providers for other services or investing in a fund that isn’t managed by a fiduciary so long as you understand the risks. However, it can be a costly mistake to blindly assume that all the plan’s service providers are acting as fiduciaries.
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.