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The Different Flavors of ERISA Fiduciaries, Redux (Part 4)

Some in-depth explanations on misunderstood subjects.

W. Scott Simon, 06/03/2010

Have a comment, insight, or burning opinion on this article?Make your feelings known in the comments section.

In this month's column, I will continue in my quest to (hopefully) help satisfy the craving for accurate information concerning the different flavors of fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA). 

Two Classes of ERISA Named Fiduciaries
The statutory scheme of ERISA invests a group of named fiduciaries with the responsibility for implementing and carrying out the administrative and investment duties of running a qualified retirement plan such as a 401(k) plan. ERISA section 402(a)(2) identifies a "named fiduciary" as "a fiduciary who is named in the plan instrument [i.e., plan document] or who, pursuant to a procedure specified in the plan, is identified as a fiduciary." ERISA therefore defines two classes of named fiduciaries. (The use of the word "class" here is not meant to suggest that one class is better than the other; only that they are different under ERISA.)

The first class of named fiduciaries is "a fiduciary who is named in the plan instrument [i.e., plan document] ..." This class includes (1) the ERISA section 3(21) named fiduciary, (2) the ERISA section 3(16) plan administrator and (3) the ERISA section 403(a) trustee.

The 3(21) Named Fiduciary can be called the "Mother of All Fiduciaries" because ERISA centralizes in that fiduciary the ultimate responsibility for retaining, evaluating and monitoring all fiduciaries of, and service providers to, a qualified retirement plan. This necessarily requires all fiduciaries and service providers to report to the 3(21) Named Fiduciary. Typically, the plan sponsor (or some executive employed by the sponsor) is named in the plan document as the 3(21) Named Fiduciary. (The plan sponsor also has the option to delegate its duties as the plan's 3(21) Named Fiduciary to an independent 3(21) Named Fiduciary who will then be so named in the plan document through amendment by the sponsor.)

The 3(16) Plan Administrator can be called the "Great Communicator" because it coordinates communications among the plan, plan participants and the government.  (The 3(16)--which carries out duties fiduciary in nature - should not be confused with a plan's third party administrator--which carries out duties ministerial in nature.) Typically, the plan sponsor (or some executive employed by the sponsor) is named in the plan document as the 3(16) Plan Administrator.

The 403(a) Trustee can be called the "Investment Fiduciary" because it is solely responsible and liable for a plan's investment options. (The 403(a) Trustee named in a plan document should not be confused with the trustee that enters into a contract with the plan sponsor to provide custodial services to hold the assets of the plan's trust. The latter is a trustee with respect to state banking and trust laws but is not the 403(a) Trustee or any other ERISA named fiduciary with discretionary authority. Typically, the plan sponsor (or some executive employed by the sponsor) is named in the plan document as the 403(a) Trustee.

The other class of named fiduciaries is "a fiduciary who ... pursuant to a procedure specified in the plan, is identified as a fiduciary." This class includes, for example, an ERISA section 3(38) Investment Manager. The plan sponsor has the inherent duties to select, monitor and replace a plan's investment options unless the plan document names another person or persons to serve as the 403(a) Trustee. But virtually all plan documents also include language that allows for the plan sponsor, at its option, to delegate its inherent selection/monitoring/replacing duties to an ERISA section 3(38) Investment Manager--whether those duties have been assigned in the plan document to the 403(a) Trustee from the time of the plan's inception (more typically) or whether the sponsor has retained those duties unto itself all along.

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