Plan sponsors can limit their responsibility and liability by appointing a fiduciary.
There is a widespread misconception even among many otherwise well-informed employee benefits attorneys that sponsors of qualified retirement plans such as 401(k) plans cannot delegate their day-to-day administrative and investment fiduciary responsibilities and liabilities to others.
This is not true. In fact, ever since President Gerald Ford gave life to the Employee Retirement Income Security Act with the stroke of his pen on Labor Day 1974, plan sponsors have been able to not only delegate virtually all of their fiduciary responsibilities but also their liabilities related to those responsibilities. A plan sponsor (via its board of directors), however, will always retain a residual, final fiduciary responsibility to monitor and decide whether those to whom it has delegated--my suggestion would be a professional named fiduciary--should continue in their position. All discretionary duties (and hence responsibilities and liabilities) can, at the option solely of the plan sponsor, remain with the named fiduciary until the plan sponsor decides to take them away from that fiduciary. This should comfort those plan sponsors who fear "losing control" of their plan.
A new series in this column will explain how plan sponsors can delegate their responsibilities and liabilities to a professional named fiduciary--without losing control of their plan--and let the fiduciary, in effect, run the plan. This allows plan sponsor executives to, in effect, get the heck out of the retirement plan business, thereby freeing them to concentrate fully on their business so they can stay in business during these troubled times.
Back (Yet Again) to the Basics of ERISA
When the executives of a business decide to establish a retirement plan such as a 401(k) plan, it's been my experience that virtually none of them have the foggiest idea about the nature of the significant bundle of responsibilities and liabilities which, by law, the fiduciaries (typically the executives) of the plan must assume.
The law to which I refer, of course, is ERISA which requires that all assets (except insurance contracts) of qualified retirement plans such as 401(k) plans be held in trust. Those deemed responsible for investing and managing 401(k) plans most therefore live up to the standard of trust law. That standard, which is the highest known in law, has been described this way: "By declaring that all retirement.assets are held in trust.[participants and their beneficiaries] are guaranteed the highest standard of conduct in the management and investment of assets for retirement that the law can establish. A trustee.carries the greatest burdens of care, loyalty and utmost good faith for the beneficiaries to whom he or she is responsible."
This alludes to language in ERISA section 404(a) which lies at the heart of ERISA. The duties required of fiduciaries under ERISA section 404(a) include ensuring compliance with the great sole interest and exclusive purpose rules, the prudent man rule, the duty to expend only reasonable costs, the duty of diversification and the duty to follow plan documents and instruments unless their terms violate ERISA.
It's bad enough that virtually no business executives are aware that they bear significant fiduciary responsibilities and liabilities for the plans they sponsor. What's even worse is that breach of these responsibilities by such executives can result, under section 409(a) of ERISA, in personal liability for them. ERISA Interpretive Bulletin 96-1 spells this out: "Fiduciaries of an employee benefit plan [such as a 401(k) plan] are charged with carrying out their duties prudently and solely in the interest of participants and beneficiaries of the plan, and are subject to personal liability to, among other things, make good any losses to the plan resulting from a breach of their fiduciary duties."
When business executives serve as sponsors of 401(k) plans, then, they must at a minimum: (1) live up to the standard of trust law which is the highest known in law; (2) comply with the sole interest and exclusive purpose rules, the prudent man rule, the duty to expend only reasonable costs, the duty to diversify broadly, and the duty to follow plan documents and instruments unless their terms violate ERISA; and (3) become subject to personal liability.