The rules that govern
the behavior of retirement plan fiduciaries are quite complex. Any
time we are required to deal with complicated subject matter, things
can get confusing, potentially leading to decisions based on a
In this issue, we will try to clear up some common misconceptions
that we hear from time to time regarding fiduciary responsibility.
(Cue the music and flashing lights…) This is Fiduciary Fact or
Statement: The fidelity bond
that all plans must have that is reported on the Form 5500 each year
insures the plan itself and does not protect plan fiduciaries from
Fact or Fiction: Fact
An ERISA fidelity bond must list the plan, not the plan
fiduciaries, as the named insured and protects against losses due to
fraud or dishonesty by plan officials. The bond does not provide any
protection to plan fiduciaries who might face legal claims due to
such losses. Only certain insurance companies are authorized to
issue fidelity bonds. A list of these approved companies is
available on the IRS website at
Fiduciaries can obtain fiduciary liability insurance that
provides coverage for expenses such as legal defense or monetary
judgments. Like many other types of insurance, these policies differ
based on features such as deductibles, exclusions, etc., so it is
important to work with a property and casualty agent who understands
the nuances of ERISA fiduciary liability.
Qualified Default Investment Alternatives
Statement: All 401(k) plans are
required to choose a QDIA into which they direct contributions for
participants who have not made investment elections.
Fact or Fiction: Fiction
Ever since participant-directed investments came on the
retirement plan scene, there have been instances in which
contributions are allocated to the account of a participant who has
not made an investment election. How are those dollars invested?
The Pension Protection Act of 2006 (PPA) tried to provide an easy
answer to that question by creating the QDIA. Those rules basically
say that plan fiduciaries who follow the PPA guidelines in selecting
and monitoring a plan's default investment are deemed to have made a
prudent decision. However, there are other appropriate choices that
don't fit within the QDIA rules. For example, money market funds do
not fall within the definition of a QDIA; however, many investment
professionals believe that in a volatile economy, a money market
fund is a prudent default. Just because it isn't a QDIA does not
make it imprudent.
Some plans choose not to designate a default at all. Rather, they
make sure they have one-on-one meetings with each employee eligible
for the plan to ensure investment elections are made. If all
participants make elections, there is no need for a default
Statement: A plan sponsor who
appoints other fiduciaries or hires a "co-fiduciary" service
provider such as an investment professional can be held liable for
the actions of those other fiduciaries.
Fact or Fiction: Fact
Being a fiduciary is somewhat like being a parent. A mother is
not any less of a parent simply because the father is a "co-parent."
Both are parents in their own right, regardless of whether there is
another parent involved.
So it is with plan fiduciaries, which makes the term
"co-fiduciary" somewhat of a misnomer. If Jane Doe is a fiduciary,
the fact that another plan sponsor representative or a service
provider is also a fiduciary does not make Jane any less of one.
When there are multiple fiduciaries, their liability is said to be
"joint and several." This concept is best explained by a quick
example. Assume a plan has four fiduciaries, and there is a
fiduciary breach claim that results in $1 million in damages. Each
fiduciary is responsible for the full $1 million, not $250,000 ¼ of
the total) or some other pro rated amount.
There are several reasons this is important. First, it highlights
the importance of using caution when selecting those who will serve
on plan committees. While the idea of involving rank and file
employees in plan management decisions might engender positive
relations, an employee who doesn't understand all that is required
of a plan fiduciary could create liability for other committee
members, trustees, etc.
Second, it emphasizes the importance of hiring service providers
who are truly experts in the field and are focused on acting in the
best interest of plan participants.
Participant Investment Direction and 404(c)
Statement: Compliance with ERISA
section 404(c) is mandatory and ensures that plan fiduciaries will
not get sued.
Fact or Fiction: Fiction
As a quick recap, ERISA section 404(c) says that if plan sponsors
meet certain requirements related to the number of investment
options available, frequency of participant access and disclosure of
information, the fiduciaries are not responsible for any losses that
result from participants directing the investment of their own
Compliance with 404(c) is completely optional, and it does not
guarantee a fiduciary will not get sued. It simply says that in the
event of a lawsuit, fiduciaries use a different method to
demonstrate they are not responsible for the losses in question. The
lawyers still get involved, and the fiduciaries still have to defend
One of the core principles of fiduciary duty is to always act in
the best interest of plan participants. Some sponsors believe that
allowing participants with no investment experience to move their
investments any given day among 20 different options is definitely
not in participants' best interests. Anecdotal evidence suggests
that more limited access such as allowing participants to choose
once each year from three professionally managed, risk-based
portfolios can lead to more favorable performance over time.
Daily access with 20 funds is 404(c) compliant (assuming all the
disclosure requirements are satisfied) while annual access with
three portfolios, by definition, does not qualify for 404(c)
protection. However, one could certainly argue that the latter
alternative is in the best interest of a participant population with
no investment expertise.
Statement: Fiduciaries have an
obligation to monitor their service providers on an ongoing basis to
ensure they continue to be prudent choices.
Fact or Fiction: Fact
Many articles focus on the due diligence that should go into
selecting those people or companies that provide services to a plan.
What is sometimes overlooked, however, is the requirement that plan
fiduciaries monitor the performance of those providers on an ongoing
basis to make sure that all the factors supporting the original
selection continue to be present and relevant. If circumstances
change either with the plan or the provider, fiduciaries must assess
the impact on the provider relationships.
Consider a large institution that comes under new management that
does not share the previous commitment to servicing retirement
plans. Fiduciaries must decide whether it is prudent (in the best
interest of plan participants) to continue working with that
institution. Sometimes, the plan, rather than the provider,
experiences a change that warrants looking elsewhere. Any number of
factors such as company growth or a recent acquisition could suggest
that it is prudent to consider other providers.
This is not to suggest that a provider change is a foregone
conclusion every time there is some extraordinary event. Maybe, a
plan's growth makes it eligible for slightly lower fees at a larger
institution, but the current investment advisor's familiarity with
the company's culture, goals and employees allows him or her to
provide very personalized service. The fiduciaries could very well
determine that it is prudent to pay the higher fee in order to
retain the personal service and trust they have with their current
The point is that fiduciaries should regularly assess their
providers in light of the relevant facts and circumstances and
document their decisions regardless of what that decision happens to
Statement: Fiduciaries must take
steps to minimize the expenses related to maintaining the plan.
Fact or Fiction: Fiction
With all the regulatory focus on fee disclosure over the last
five years, it would be easy to believe that every fiduciary's
primary goal should be to control costs. It is never a good idea to
overpay for a good or service, but there are two critical elements
when it comes to retirement plan fees: reasonableness and value.
A Department of Labor Advisory Opinion from the late 1990s
indicates, "…it is the view of the Department that a plan
fiduciary's failure to take quality of service into account in the
selection process would constitute a breach of the fiduciary's
duties under ERISA…"
You would not want to save a few dollars by hiring the family's
general practitioner to perform your knee replacement surgery.
Similarly, you do not want to sacrifice quality and expertise to
save a few dollars in plan expenses.
Consider a plan that has more than 100 participants and is
required to hire a CPA to audit the financial statements each year.
The CPA that prepares the sponsor's tax return has done other types
of company audits and offers to do the ERISA audit for one price,
while several other firms specializing in plan audits quote a fee
that is three times higher. ERISA plan audits have very specific
requirements that call for unique expertise. While the specialty
firms' fees are higher, their expertise likely makes them the more
Articles that attempt to simplify the complex regulatory
framework that applies to plan fiduciaries are written on a regular
basis. Marketing materials can make it challenging to understand
where "suggested" ends and "obligatory" begins.
Fiduciary duty can be distilled into always acting in the best
interest of plan participants, but the devil, as they say, is in the
details. That is why it is important to work with experts who can
help you separate Fiduciary Fact from Fiduciary Fiction.