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A Closer Look at Fiduciary Status Under ERISA

Get the details on plan sponsors as default fiduciaries and how ERISA fiduciary status is determined.

W. Scott Simon, 12/01/2011

In this month's column, I thought it might be interesting to provide advisors with some essential information about the meaning of fiduciary status under the Employee Retirement Income Security Act (ERISA).

Different Kinds of Plan Fiduciaries
ERISA, which governs qualified retirement plans such as 401(k) plans, makes clear that certain fiduciaries--including named fiduciaries, the plan administrator, and trustees--will "run" a plan.

A named fiduciary is the chief decision-maker in a plan. It retains, evaluates, and monitors plan fiduciaries and plan service providers, and consequently fiduciaries and service providers must report to the named fiduciary. In the typical 401(k) plan, the sponsor of the plan (i.e., the employer)--or more precisely some executive employed by the sponsor--is the named fiduciary.

The plan administrator is essentially a coordinator of communications in a plan. It has responsibility under ERISA for making important disclosures to plan participants such as summary plan descriptions, notices, and statements. It also has statutory responsibility for ensuring that all filings (e.g., Form 5500s) with the federal government are timely made. In the typical 401(k) plan, either the plan sponsor or some executive employed by the plan sponsor is the plan administrator.

A plan trustee is the fiduciary solely responsible and liable for a plan's investment options. In the typical 401(k) plan, a plan trustee is an employee of the plan sponsor.

The Plan Sponsor as Default Fiduciary
ERISA, which governs qualified retirement plans such as 401(k)s, makes clear that certain fiduciaries will "run" a plan. For example, ERISA section 402(a) provides, among other things, that an employee benefit plan must be established and maintained pursuant to a written instrument. This instrument, also called a "plan document" or "plan instrument," must provide for one (or more) named fiduciaries and endow same with the authority to control and manage the operation and administration of the plan. (The "trust instrument" or "trust document," in contrast, pertains to the plan trust.) A plan's named fiduciary must be named either in the plan document or designated through a procedure specified in the plan document. (DOL Advisory Opinion 2002-06A, July 3, 2002.)

Suppose, though, that a named fiduciary is neither named in the plan document nor designated by a procedure specified in the plan document. In any ensuing lawsuits by plan participants (or regulators) against a plan's sponsor, the court in its efforts to sort out responsibilities and assign liabilities would no doubt hold the sponsor to be the named fiduciary. While the naming or designation of a plan's named fiduciary is mandatory, note that ERISA doesn't require the plan administrator to be named or designated pursuant to a procedure specified in the plan document. Indeed, the plan sponsor can become the plan administrator by default with no act otherwise necessary.

In either case--when a named fiduciary must be named/designated under ERISA section 402(a) (but isn't) or when the plan administrator need not be named/designated under ERISA section 3(16) (and isn't)--ERISA presumes, by default, that the plan sponsor will be a named fiduciary and the plan administrator, and will be required to assume all the fiduciary duties and liabilities associated with each such fiduciary function. So in the absence of any language identifying a named fiduciary or the plan administrator, the plan sponsor is presumed to be both of these fiduciaries. A plan sponsor inherently wears the fiduciary hats of a named fiduciary and the plan administrator until other entities are otherwise named or designated pursuant to a procedure specified in the plan document. After all, plan participants must, upon examining the plan document, be able to ascertain who the heck is responsible for operating the plan. In most plan documents, of course, the plan sponsor is actually named or designated as both a named fiduciary and the plan administrator.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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