Posts

Print Friendly Version Print Friendly Version

Are Plan Committee Members Fiduciaries?

An advisor asked: “Can an individual member of a 401(k) plan committee have personal fiduciary liability?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Indiana is representative of a common question on plan committee members.

Highlights of the Discussion

  • A plan committee member may be a plan fiduciary and, consequently, held personally liable to the plan if he or she is granted or exercises discretion in the operation or administration of a retirement plan that is subject to the Employee Retirement Income Security Act of 1974 (ERISA).
  • According to the Department of Labor (DOL) Interpretive Bulletin 75-5, if the governing plan documents state the plan committee controls and manages the operation and administration of the plan and specifies who shall constitute the plan committee (either by position or by naming individuals to the committee), then such individuals are named fiduciaries of the plan pursuant to ERISA §402(a) (see page 212 of linked document).
  • A number of court cases have found that a plan committee member may be a functional fiduciary of the plan because of his or her actions and subject to personal liability if he or she exercises discretion in the administration of the plan Gaunt v. CSX Transp., Inc., 759 F. Supp. 1313 (N.D. Ind. 1991).
  • Pursuant to ERISA §409 (see page 250 of linked document):

Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries … shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.

  • Having a committee charter may help mitigate fiduciary liability for the committee members by carefully outline the members roles and responsibilities. Please see our Case of the Week 401(k) Plan Committee Charter for best practices.

Conclusion

A plan committee member may be a plan fiduciary and, consequently held personally liable to the plan for losses resulting from fiduciary breaches.  Having a committee charter may help mitigate fiduciary liability for the committee members.

© Copyright 2021 Retirement Learning Center, all rights reserved
fiduciary
Print Friendly Version Print Friendly Version

What is a “flexible” ERISA 3(38)

“Is there such a thing as a ‘flexible’ ERISA 3(38) fiduciary?”  

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from New Hampshire is representative of a common inquiry related to ERISA fiduciary services.

Highlights of the Discussion

According to a strict reading of ERISA and its regulations under 29 U.S.C. Title 29 §3(38)—no; there is no such legally defined entity. However, in practice, there are ERISA 3(38) fiduciary services that are advertised as “flexible.” Let’s start with the definition of an ERISA §3(38) plan fiduciary. An ERISA 3(38) fiduciary is an investment manager that is a registered investment advisor (e.g., RIA, bank or insurance company), appointed by the plan sponsor to fully manage the assets of the plan. Such individual or entity has the power to manage, acquire, or dispose of any asset of a plan; is responsible for selecting, monitoring and replacing plan investment options; and has full discretion regarding a plan’s investment management process. When the 3(38) fiduciary is appointed, a written agreement must be executed acknowledging the 3(38)’s fiduciary responsibility for managing the assets of the plan. ERISA 3(38) relieves the plan sponsor of fiduciary liability with respect to the selection, performance, monitoring and replacement of the investments for a plan when the sponsor has prudently selected the 3(38) investment manager; and the sponsor continues to monitor the 3(38)’s services. As one can see, the strict definition of an ERISA 3(38) does not seem to leave room for too much, if any, flexibility.

A few firms that offer 3(38) services have added the “flexible” moniker or adjective to describe situations where the plan sponsor can provide the 3(38) investment manager with “suggestions” regarding the investment line up. These plan sponsor suggestions could range widely from encouraging the 3(38) to take over and assume responsibility for an existing investment line up; providing input on investments the plan sponsors would like the 3(38) to add to the 3(38)’s available options; or having the ability to select from a broad universe of investments that are within the 3(38)’s fiduciary coverage universe to create the investment line up. The gnawing question becomes has the plan sponsor exerted discretion over the investment decisions and, thereby, clawed back some of the fiduciary responsibility it sought to relinquish? There is no clear answer. It is another one of those “facts and circumstances” situations the DOL and courts would evaluate on a case by case basis. But it is important to be aware of and take into consideration when making a decision that flexibility can muddy the fiduciary liability and relief waters.

Conclusion

Some firms advertise a flexible 3(38) investment management solution. Plan sponsors and their advisors should be sure they 1) understand what precisely the flexibility is; 2) evaluate if it could potentially affect liability; 3) make a prudent, educated decision based on the information; and 3) record the decision making process for their fiduciary process records.

© Copyright 2021 Retirement Learning Center, all rights reserved