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Fiduciary Responsibilities and How a Plan Sponsor May Transfer Liability

Most plan sponsors understand that they have a fiduciary obligation to prudently administer their  retirement plans. What many plan sponsors do not understand is the degree by which their actions constitute fiduciary conduct, the standards they should follow, and the requirements of the law. Perhaps most surprisingly, plan sponsors may not understand that opportunities exist whereby they may transfer some of their fiduciary obligations to other parties.

The communication is offered solely for discussion purposes.  Lockton does not provide legal or tax advice.  The services referenced are not a comprehensive list of all necessary components for consideration.  You are encouraged to seek qualified legal and tax counsel to assist in considering all the unique facts and circumstances.  Additionally, this communication is not intended to constitute U.S. federal tax advice, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending any transaction or matter addressed herein to another party.

This document contains the proprietary work product of Lockton Financial Advisors, LLC, and Lockton Investment Advisors, LLC, and is provided on a confidential basis.  Any reproduction, disclosure, or distribution to any third party without first securing written permission is expressly prohibited.

Securities offered through Lockton Financial Advisors, LLC, a registered broker-dealer and member of FINRA, SIPC. Investment advisory services offered through Lockton Investment Advisors, LLC, an SEC-registered investment advisor.  For California, Lockton Financial Advisors, LLC, d.b.a. Lockton Insurance Services, LLC, license number 0G13569.

The Employee Retirement Income Security Act (ERISA) defines a retirement plan fiduciary under three broad categories:

Management

  • One who exercises any discretionary authority or discretionary control respecting management of the plan, or exercises any
  • authority or control respecting management or disposition of assets.

Investment

  • One who renders investment advice for a fee or other compensation with respect to any assets of the plan.

Administration

  • One who has any discretionary authority or discretionary responsibility in the administration of the plan.

As these categories would indicate, the ERISA breakdown of fiduciary status is determined by action, not by title. Many of the actions involved in operating a plan make a person or entity performing the function a fiduciary to a plan.

Fiduciary Standards of Conduct

Plan fiduciaries have the following standards of conduct:

  • Act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.
  • Carry out duties prudently.
  • Follow plan documents.
  • Diversify plan investments.
  • Pay only reasonable plan expenses.

Fiduciaries are required to follow the basic standards of conduct listed above. If these standards are reached, a plan sponsor may be held liable, and the individual fiduciary may also be held personally liable.

The Supreme Court recently affirmed that individual plan participants may sue a fiduciary for a breach of its responsibility. Additionally, not only are fiduciaries liable for their actions, they also could be liable for the actions of their co-fiduciaries.

Transfer of Liability

As evidenced above, a plan sponsor may assume different fiduciary titles, each with different responsibilities. Fiduciary classification is not an “all or nothing” concept, meaning that a person may be a fiduciary with  respect to one aspect of plan administration or management or with respect to only a portion of plan  assets over which the person renders investment advice for a fee. The personal liability of a fiduciary is generally limited to the fiduciary functions which it performs with respect to the plan. In accordance, the plan sponsor may wish to transfer some of these responsibilities to others in order to mitigate its liability with respect to that fiduciary responsibility.

 

Fiduciary Type Ability of Plan Sponsors to Transfer Liability Examples
MANAGEMENT Yes, Plan Sponsors can transfer some or all of their management authority to outside service providers. Third-Party Administrators, Multiple Employer Plans, Trustee, Recordkeeper, Investment Manager
INVESTMENT Yes, Plan Sponsors can transfer some or all of their investment authority to outside service providers. Investment Adviser, Investment Manager, Trustee
ADMINISTRATION Yes, Plan Sponsors can transfer some or all of their administration authority to outside service providers. Third-Party Administrator, Multiple Employer Plans, Recordkeeper, Trustee

 

While a plan sponsor may choose to limit liability by hiring service providers to perform some fiduciary functions, the plan sponsor will never be able to completely absolve itself from the fiduciary standards of conduct. Specifically, the plan sponsor will still retain the following monitoring obligations upon hiring a service provider to fulfill a fiduciary role:

Selection of the fiduciary:

  • Investigate its qualifications.
  • Ensure conflicts of interest, self-dealing, and other improper influence is avoided.
  • 408(b)(2) evaluation, assessing:
    • Services offered.
    • Fees charged for services.
    • If the service provider is a fiduciary, make sure this status is disclosed.
  • Ask about policies and practices.
  • Make certain that reliance on the service provider is justified under the circumstances.
  • Provide the service provider with complete and accurate information.
  • Monitor the service provider periodically to assure it is handling its responsibilities with prudence and in line with its agreement.
  • Maintain documentation showing the monitoring of the activities of the service provider in order to establish prudence.

Failure of a plan sponsor to comply with any of the monitoring responsibilities above may result in liability to the plan sponsor. Further, if in the review of a service provider, the plan sponsor becomes aware of a fiduciary breach, the plan sponsor has an obligation to act accordingly or risk becoming liable of the breach as well.

Limitation on the scope of the fiduciary’s liability may not apply to the named fiduciary. The named fiduciary is charged with the broadest fiduciary responsibility under the plan and can be liable for all phases of the plan’s management and administration. This means the named fiduciary must be diligent in overseeing the other fiduciaries of the plan. Failure to act prudently in this regard can subject the named fiduciary to liability for the breaches of these other fiduciaries.

For more information, please contact Lockton Retirement Services.

The communication is offered solely for discussion purposes.  Lockton does not provide legal or tax advice.  The services referenced are not a comprehensive list of all necessary components for consideration.  You are encouraged to seek qualified legal and tax counsel to assist in considering all the unique facts and circumstances.  Additionally, this communication is not intended to constitute U.S. federal tax advice, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending any transaction or matter addressed herein to another party.
 
This document contains the proprietary work product of Lockton Financial Advisors, LLC, and Lockton Investment Advisors, LLC, and is provided on a confidential basis.  Any reproduction, disclosure, or distribution to any third party without first securing written permission is expressly prohibited.
 
Securities offered through Lockton Financial Advisors, LLC, a registered broker-dealer and member of FINRA, SIPC. Investment advisory services offered through Lockton Investment Advisors, LLC, an SEC-registered investment advisor.  For California, Lockton Financial Advisors, LLC, d.b.a. Lockton Insurance Services, LLC, license number 0G13569.
 

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