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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.

To recap, then, there are two classes of named fiduciaries: (1) the three (3(21), 3(16) and 403(a)) that are named in the plan document and (2) those such as a 3(38) Investment Manager that are identified as a fiduciary pursuant to a procedure specified in the plan.

All Other ERISA Fiduciaries Are Limited Scope (or Non-Named) Fiduciaries
All entities that in some way become fiduciaries under ERISA - other than the two classes encompassing the Big Four named fiduciaries just described--are, by definition, ERISA section 3(21) "limited scope" fiduciaries (or perhaps "non-named" fiduciaries in deference to the sensitivities of those bothered in some way by the term "limited scope"). There are three ways under ERISA by which entities become limited scope/non-named fiduciaries: (1) by retention or appointment, (2) by giving "advice" or (3) by behavior.

By Retention or Appointment
The first way that an entity becomes a limited scope/non-named 3(21) fiduciary is by being retained or appointed by one of the Big Four named fiduciaries to carry out some duty limited in scope (ERISA section 3(21)(A)(i) and/or 3(21)(A)(iii)). In reality, most of these retentions or appointments are made by the 3(21) Named Fiduciary (whether the 3(21) is the plan sponsor itself or an independent 3(21) Named Fiduciary to whom the sponsor has delegated its 3(21) duties). For the purposes of this column, then, retentions or appointments made only by a plan sponsor or an independent 3(21) Named Fiduciary will be discussed.

Such retentions or appointments can be characterized as those where a plan sponsor or an independent 3(21) Named Fiduciary, in effect, "deputizes" a limited scope/non-named 3(21) fiduciary to carry out a discretionary assignment limited to a specific scope of responsibility. For example, the fact patterns of some recent ERISA litigation have included the plan sponsor delegating discretionary authority to a limited scope/non-named 3(21) fiduciary. The scope of the authority granted was limited to the specific responsibility of deciding whether or not it would prudent for the retirement plan to hold the company stock of the sponsor. Once the decision was made, the limited scope/non-named 3(21) "deputy" fiduciary reported it back to the plan sponsor, thereby completing the limited scope assignment and ending the delegation.

A limited scope/non-named 3(21) "deputy" fiduciary that's been granted (limited) discretion by one of the Big Four named fiduciaries is quite rare. It's even rarer when such a fiduciary is an investment advisor. (Please don't confuse this situation where an investment advisor--as a limited scope/non-named 3(21) fiduciary--rarely receives a limited grant of discretionary authority with the situation where an investment advisor--more exactly, a registered investment advisor--is granted very significant discretionary authority as an ERISA section 3(38) Investment Manager.) In cases where such "deputies" are retained or appointed, they are almost always someone with a skill set different than an investment advisor--such as a CPA or attorney. The deputy could even be an employee of the plan sponsor who has the skills to complete a specific task.

Note that the discretionary authority for the selection/monitoring/replacement duties concerning a plan's investment options always remains within the exclusive bailiwick of the plan's named fiduciaries whether it is the plan sponsor (or, as noted, the independent 3(21) Named Fiduciary in the case of delegation from the plan sponsor) or the plan's 403(a) Trustee, or, as noted under certain circumstances, a 3(38) Investment Manager. In this latter case, an investment advisor--more exactly, a registered investment advisor--is granted discretion; indeed, very significant discretion.

A written contract is used in cases where the plan sponsor (or independent 3(21) Named Fiduciary) retains or appoints an entity to become a 3(21) limited scope/non-named fiduciary and grants it limited discretionary authority to carry out a specific assignment. This contract signals that the conduct of the entity is obviously intentional, thereby affirming its desire to become a 3(21) limited scope/non-named fiduciary.

By Giving "Advice"
The second way that an entity becomes a limited scope/non-named 3(21) fiduciary is by providing ERISA-defined "advice" to a plan sponsor and/or to plan participants (ERISA section 3(21)(A)(ii)). An entity such as an investment advisor is nearly always a limited scope/non-named 3(21) fiduciary without discretion since, by definition, it's only an advice-giver. This means that it only has the duty of loyalty to put the interests of its clients first by providing competent advice commensurate with that if a "prudent expert." But it cannot hire anyone. It cannot unilaterally change plan investment options or plan service providers. It cannot make decisions, but only convey advice. Because it has no discretion, it generally has no legal responsibility for the advice it gives other than the fiduciary duty of loyalty to put the interests of its clients first.

None of this is to say, however, that many investment advice-givers don't provide good or even excellent advice to their plans sponsor clients. It is only to say--legally--that investment advisors have no discretion under ERISA and therefore little real legal responsibility and therefore little real legal liability for the advice they do convey.

A written contract is used in cases where the plan sponsor (or independent 3(21) Named Fiduciary) grants non-discretionary authority to an entity to become a 3(21) limited scope/non-named fiduciary in order to provide ERISA-defined "advice" to a plan sponsor and/or to plan participants. This contract signals that the conduct of the entity is obviously intentional, thereby affirming its desire to become a 3(21) limited scope/non-named fiduciary.

By Behavior
The third way that an entity becomes a limited scope/non-named fiduciary is by behavior (ERISA section 3(21)(A)). In this kind of situation, such an entity could, for example, be authorized to provide ERISA-defined "education" to a plan's participants by a Big Four named fiduciary in a written contract but then inadvertently step over the (legal ERISA) line by giving ERISA-defined "advice" without being authorized to do so. A more serious scenario is where a person unilaterally exercises discretionary control or authority over a plan without express authorization. Such a person can become a "functional" 3(21) limited scope/non-named fiduciary--without a written contract--through its mere conduct of providing unauthorized advice or exercising unauthorized control or discretion. Given that no contract is present in this situation, the entity obviously doesn't intend to become a 3(21) limited scope/non-named fiduciary but becomes so anyway through its inadvertent conduct.

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