Alliance Bernstein recently released the shocking result of a survey it had taken of plan sponsors: a whopping 37% of those fiduciaries surveyed didn’t know that they were fiduciaries.
Obviously, it is unlikely that these individuals are fulfilling their fiduciary responsibilities if they are unaware of their status. And we wonder what will happen if the plans of these oblivious fiduciaries are selected for a Department of Labor audit, though we are sure that it won’t be a pretty picture.
It is possible to be an ERISA fiduciary and not know it, because no acknowledgement of fiduciary status is required. ERISA has a functional definition of fiduciary, which means that you become a fiduciary based on what you do. Administration, investment control and giving investment advice for a fee are the activities that trigger fiduciary status. ERISA also provides that there must always be at least one named fiduciary to manage a plan, and this will be the Company and its directors if no other designation is made.
Another form of ignorance can complicate this problem, because it is also possible to believe that your plan service providers are fiduciaries when they are not. Small plan fiduciaries are not the only ones under these misconceptions. Misplaced reliance on what these non-fiduciary vendors are doing can result in avoidable compliance failures and litigation exposure. Here is a short checklist for people who have relationships with employee benefit plans:
- If you are a director, you have some fiduciary responsibilities even if the board has delegated authority to other fiduciaries.
- If you are a plan trustee, you are a fiduciary.
- If you are on a plan committee, including an investment or administrative committee, you are a fiduciary.
- If you have adopted a prototype or other pre-approved plan, your vendor is not a fiduciary unless it has agreed to make decisions and become an administrator as defined in Section 3(16) of ERISA or manages investments.
- If you have appointed an investment manager with the authority to make investment decisions, the investment manager is a fiduciary.
- If you are receiving investment advice from a broker or registered investment adviser, you may not be receiving advice from an ERISA fiduciary as the law stands now. It all depends on factors such as whether the advice is one-time or on a regular basis, or is given with the understanding that it will be a primary basis for plan investment decisions. The Department of Labor, with the support of the Obama administration, has been working on a controversial new proposal to extend ERISA fiduciary responsibilities to brokers and others who provide investment advice to plans, but so far, is being close-mouthed about what it says.
Since fiduciaries may be personally liable for losses caused by fiduciary breaches, knowing whether you and your vendors are fiduciaries is essential self-defense against being blind-sided in the pocketbook by a court award, audit penalty or settlement.