Some in-depth explanations on misunderstood subjects.
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In this column last month I promised that, given the widespread interest in the different flavors of fiduciaries under the Employee Retirement Income Security Act of 1974, I would delve into these subjects even more than I've done already to satisfy the craving for accurate information concerning these often misunderstood subjects. So away we go.
The Essential Fiduciary Players in a Retirement Plan
The ERISA statutory scheme contemplates that all fiduciary duties originate with, and belong to, the sponsor of a qualified retirement plan such as a 401(k) plan. Some of these duties are usually parceled out to different named fiduciaries through the plan document and trust instrument of the plan. In this column, I'll use the term "plan document" to encompass a plan's plan document and trust instrument. That term will also include any written contract between an appointing fiduciary and an appointed fiduciary involving the plan since any such contract appointing a fiduciary is deemed by the U.S. Department of Labor to be a "plan document." For example, an ERISA section 3(38) Investment Manager is not typically named in a plan document or trust instrument but instead is appointed by the plan sponsor or the Named Fiduciary in a contract; that contract then becomes part of the plan document.
Four Named Fiduciaries
Upon signing the plan document, a plan sponsor, in effect, "announces" the "arrival" or the "birth" of a qualified retirement plan. Some of a plan sponsor's duties, as noted, are parceled out to different named fiduciaries. A "named fiduciary" is "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 section 402(a)(2).)
There are four "named fiduciaries" under ERISA: (1) the ERISA section 3(21) Named Fiduciary, (2) the ERISA section 3(16) Plan Administrator, (3) the ERISA section 403(a) Trustee and (4) the ERISA section 3(38) Investment Manager. The first three of these named fiduciaries are named in the plan document (specifically, the plan document and trust instrument) while the fourth one--the 3(38) Investment Manager--can be named in a contract "pursuant to terms set forth in the plan."
A plan sponsor typically retains the duties of the first and second named fiduciary, delegates duties to the third named fiduciaries, and more rarely delegates duties to the fourth named fiduciary.
1. The ERISA Section 3(21) Named Fiduciary: The Mother of All Fiduciaries
The ERISA section 3(21) Named Fiduciary (referred to in this column previously as the "full scope" 3(21) fiduciary) is the Big Kahuna, the Head Honcho, the Main Man in a qualified retirement plan (ERISA section 402(a)-(b); DOL regulation 2509.75-5, FR-3). This is the named fiduciary that has control over all other plan fiduciaries--whether a named fiduciary, a retained or appointed fiduciary, an advice-giving fiduciary (whether to a plan or the participants in the plan) or a functional fiduciary--and it reigns supreme. Folks, the 3(21) Named Fiduciary is the Mother of All Fiduciaries; it is not to be messed with.
In the typical 401(k) plan, the plan sponsor--or more precisely some executive employed by the plan sponsor--is named in the plan document as the principal fiduciary: the 3(21) Named Fiduciary. The 3(21) is the chief decision-maker, not an advisor. It hires, evaluates and monitors all plan fiduciaries and service providers to a plan, and consequently all fiduciaries and service providers must report to the 3(21) Named Fiduciary. The 3(21) understands and adheres to principles of fiduciary prudence, and even if it's compensated directly by a plan sponsor the 3(21) is bound by ERISA section 404(a), including the great "sole interest" and "exclusive purpose" rules, to work only on behalf of plan participants (and their beneficiaries).