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Delegation for Plan Sponsors (Part 3)

How to get some insulation from risk.

W. Scott Simon, 06/04/2009

This month I'll describe in some detail how it's possible to insulate the sponsor of a qualified retirement plan such as a 401(k) plan--the "sponsor" actually being represented collectively by real flesh and blood humans who serve as trustees and other named and functional fiduciaries of the plan--from virtually all day-to-day fiduciary investment risk as well as operational/administrative risk to which they would otherwise be subject in the act of sponsoring the plan.

Plan sponsors choosing this approach can avoid the legal landmines that are inherent in the current business model that they are forced to follow by most service providers in the retirement plan industry--a model in which these non-fiduciary product pushers are the inmates that run the asylum--and instead embrace a model in which professional fiduciaries fully conversant with the ins and outs of ERISA law and procedure are placed in charge of running the sponsor's plan as has been intended all along by the law of ERISA.

This approach centralizes authority and duties in one professional named fiduciary. Removing ERISA-defined fiduciary discretion in this way that would otherwise hang over the heads of, say, senior-level company executives and even junior-level folks in a company's human resources department prevents all of them from intentionally or inadvertently acting in a discretionary (i.e., fiduciary) role. This is critical because, under ERISA, discretion is the primary trigger of fiduciary responsibility and liability. That is, where there's no discretion, there's no responsibility. And where there's no responsibility, there's no risk or liability. VoilĂ ! Ze problem is solved. Now let's see how to actually accomplish this.

Acceptance of Appointment as a Named Fiduciary
The sponsor of, say, a 401(k) plan interested in retaining a professional independent fiduciary to take over virtually all day-to-day fiduciary investment and operational/administrative duties attendant to its plan should look for a fiduciary that will accept appointment as a "named fiduciary" pursuant to ERISA section 402(a). DOL Advisory Opinion 2002-06A (issued July 3, 2002) states, in part: "Section 402(a) of ERISA provides that every employee benefit plan [e.g., a 401(k) plan] shall be established and maintained pursuant to a written instrument. This instrument must provide for one or more named fiduciaries who have authority to control and manage the operation and administration of the plan. The named fiduciaries may be either named in the plan instrument or chosen, through a procedure specified in the plan, by the plan sponsor." ERISA section 402(a) is further explained under ERISA sections 3(16) and 3(21). These two sections of ERISA define the two primary fiduciary roles within a qualified retirement plan.

ERISA section 3(16) defines the term "plan administrator." (The fiduciary duties of a plan's plan administrator shouldn't be confused with the non-fiduciary duties of a "third party administrator" servicing the plan.) The plan administrator is the fiduciary identified by the plan document that has the discretionary authority to manage the day-to-day affairs of a qualified retirement plan. The plan administrator can be an individual or the sponsor of the plan. In most plans, the plan administrator is the plan sponsor.

ERISA section 3(21) defines a fiduciary: an individual that exercises discretionary authority or control over plan management and disposition of assets, or has authority to render advice for money whether or not advice is actually given, or has discretionary authority or responsibility in the administration of a plan. An ERISA section 3(21) fiduciary could therefore be given total discretion over an entire plan, including those duties associated with that of ERISA section 3(16), even though a plan may have specifically named a person or organization to fill that role. An ERISA section 3(21) fiduciary, then, can be a "catch-all" with respect to fiduciary responsibility. There can be interplay or overlap between section 3(16) and section 3(21) responsibilities, but these two sections of ERISA are clear enough to cover the basics with respect to day-to-day fiduciary duty.

It's important to note that some in the retirement plan industry have created marketing gimmicks to capitalize on the cache and power of being an ERISA section 3(21) fiduciary. Upon closer examination, though, the "discretion" that's actually accepted for any fiduciary responsibilities in this kind of marketing-driven environment is essentially zero, in my opinion. Such entities create the appearance of fiduciary stature, but in fact they turn out to be fiduciary nothings. One way to recognize such pretenders from a real named independent fiduciary under ERISA section 3(21) that has absolute responsibility to operate a qualified retirement plan through delegation from the plan sponsor is to be on the lookout for the term "co-fiduciary." (My four-part series three years ago documented this.) An honest-to-goodness named independent fiduciary would never use the term "co-fiduciary;" the term has no legal meaning in ERISA.

Acceptance of Appointment as the Plan Trustee
It's usually the board of directors of a company that sponsors a retirement plan that appoints a named fiduciary under ERISA section 402(a). The named fiduciary can also accept appointment as the "plan trustee" pursuant to ERISA section 403(a). DOL Advisory Opinion 2002-06A states, in part: "Section 403(a) of ERISA provides, in part, that all assets of an employee benefit plan must be held in trust by one or more trustees. The trustee(s) must have exclusive authority and discretion to manage and control such assets ... [except] ... when the plan expressly provides that the trustee(s) are subject to the direction of a named fiduciary who is not a trustee, in which case the trustees are subject to proper directions made in accordance with the terms of the plan and not contrary to ERISA ..."

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