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 (QDIAs)
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
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
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,
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
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 themselves.
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
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 advisor.
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
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 prudent option.
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.
This newsletter is intended to provide general
information on matters of interest in the area of qualified retirement
plans and is distributed with the understanding that the publisher and
distributor are not rendering legal, tax or other professional advice.
Readers should not act or rely on any information in this newsletter
without first seeking the advice of an independent tax advisor such as
an attorney or CPA.