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Frequently Asked Questions

What are the different levels of fiduciary authority?

You can read a more in-depth discussion on this topic under the “Unscrambling Fiduciary Confusion” tab.

A person is a fiduciary based on their actions not a title.

ERISA § 3(21)(A) defines who is a fiduciary.  The degree to which an individual has fiduciary authority is commonly referred to as “scope”.

The following is a brief description of the different types of fiduciaries in descending order of fiduciary authority and responsibility. Some of the terms below are descriptive industry nomenclature rather than terms found in ERISA. Let me also preface by saying that a Named Fiduciary can never relieve itself of 100% of its fiduciary responsibility and liability by outsourcing to an independent fiduciary. All fiduciaries can be held personally liable for breaches of fiduciary duty.

Named Fiduciary – the Name Fiduciary is that person or persons or the employer that is named in the plan documents as the primary responsible party or party’s for all aspects of the plan.  A great deal of time and effort is spent on understanding the many other fiduciary roles and responsibilities yet most Plan officials do not truly understand this specific and required role and how it may impact Plan operations, and related risks.

Full Scope 3(21) Fiduciary – this is an entity that the Named Fiduciary has outsourced all or most of its responsibilities under ERISA §3(21)(A).  This individual has assumed responsibility for all aspects of the plan, serving as an alternative professional plan sponsor solution, with maybe a few minor limitations.

Trustee – the Trustee is responsible for plan assets and is usually served by the Name Fiduciary although the named fiduciary can appoint someone else within the company to serve as the Trustee.  The Named Fiduciary can also outsource this responsibility to an independent third party Trustee or to a fiduciary serving as a 3(38) discretionary investment manager.

Investment Committee – this is an individual or individuals from within the company, appointed by the Name Fiduciary to be responsible for investment selection.  The Name Fiduciary(s) may not necessarily be on the committee. Members of the committee may not be employees of the Plan Sponsor.

3(16) Fiduciary – under ERISA §3(16) a person is responsible for the day-to-day administration of the plan.  This is not to be confused with a TPA (third party administrator).  This can be and usually is the Name Fiduciary.  A Name Fiduciary has the authority to outsource this responsibility to an independent third party.

3(38) Fiduciary – under ERISA §3(38) the entity is a “discretionary” investment manager having the authority and control over plan’s assets and an exception to the Trustee role.  ERISA provides that a plan sponsor can delegate total control for choosing and monitoring the plan’s investments to a 3(38) and therefore significantly reduces their liability for selecting, monitoring and replacing the plans investments.  Their ongoing responsibility is thereby limited to monitoring the 3(38).  An ERISA §3(38) fiduciary can only be a bank, an insurance company or a Registered Investment Adviser (RIA) subject to the Investment Advisers Act of 1940.

3(21) Advisor (limited scope) – this is typically an adviser who provides investment advice for a fee, leaving the final decisions to responsible company personnel for whom we discuss earlier as the “Named Fiduciary, Plan Trustee, and/or Investment Committee”.  Those providing advice have no discretionary authority or control over the management of the plan, the disposition of plan assets or the administration of the plan.  In Hecker v. Deere the court made clear in its ruling that “Merely playing a role or furnishing professional advice is not enough to transform a company into a fiduciary.”  Contrary to what ERISA says, if the courts deem someone not having discretion, not accountable as a fiduciary, then plan sponsors need to be cautious of 3(21) limited scope advisors, with an an emphasis on limited scope, claiming to be a co-fiduciary.  Plan Sponsors may not be getting the level of fiduciary protection they think they are receiving.

Fiduciary “Adviser”  

The Pension Protection Act 2006 created a new category of fiduciary providing an exemption to the prohibited transaction rules expanding the universe of those eligible to  provide investment advice to plan participants and beneficiaries. The specifics of the investment advice regulations didn’t become effective until December 27, 2011.  This category of fiduciary provides individualized participant investment advice, going beyond general investment education, providing specific recommendations to a participant for the management of their 401(k) account.  A plan sponsor is provided fiduciary liability protection from the investment advice given to participants and beneficiaries if properly contracted, rules are followed and monitored.

Our purpose here is to make you aware that this fiduciary role exists. The complexity of this role prohibits us from going into more detailand is beyond the scope of this article.
The Retirement Readiness Institute would be more than happy to discuss this in greater detail with anyone interested in having a more in-depth discussion.

The Fiduciary Adviser spelled with “er” rather than “or” was created to expand the universe of professionals, to include those having a conflict in interest, enabling them to provide individualized investment advice to plan participants and beneficiaries with respect to their investment in the plan. It is important to note that always, since the beginning of ERISA, those having no conflicts in interest providing pure level fee advice, has never been a prohibited transaction. Pure level fee advice having no conflicts in interest has never needed any special rules to work, any prohibited transaction exemptions, because it’s not a prohibited transaction. It’s always been acceptable. Typically Registered Investment Advisors (RIA) and their respective Investment Advisor Representatives (IAR) having no affiliation with a broker-dealer fall in this category.

It is a plan fiduciary’s responsibility to ensure that the line between investment education and investment advice is not crossed by an attending advisor. This responsibility includes identifying the existence of any potential conflicts in interest and engaging investment advise services with the same due diligence as any other service provided to the plan. This includes engaging this service with proper contracting and disclosures.

As a general rule anyone who is directly affiliated or indirectly affiliated as a hybrid with a broker-dealer, insurance company or company that manufactures investments is most likely at risk of having conflicts in interest, thereby requiring exemption to the prohibited transaction rules allowing the provision of individualized participant level investment advice.

For those having a conflict of interest, the Pension Protection Act requires investment advice be delivered under an Eligible Investment Advice Arrangement (EIAA) by an adviser who must agree in writing to be “acting as a fiduciary of the plan in connection with the provision of the advice”. This requirement differs greatly from the general definition of a fiduciary who acts as a fiduciary with respect to the entire plan and not limited to only those assets to which advice is connected.

Advisor Hired By a Participant Having No Other Relationship To The Plan

  • Is an individual who advises a participant, in exchange for a fee, on how to invest the assets in the participant’s account or who manages the investment of the participant’s account, having no other relationship to the plan a fiduciary with respect to the plan within the meaning of section 3(21)(A) of ERISA?

Answer:  The Department has stated on numerous occasions that directing the investment of a plan constitutes the exercise of authority and control over the management or disposition of plan assets and that the person directing the investments would be a fiduciary, even if the person is chosen by the participant and has no other connection to the plan. In addition, regulation 29 CFR § 2510-3.21(c) further clarifies the meaning of the term “investment advice.” 

The Department has taken the position that this definition of fiduciary also applies to investment advice provided to a participant or beneficiary in an individual account plan that allows participants or beneficiaries to direct the investment of their accounts. 29 CFR § 2509.96-1(c).

  • Is the plan fiduciary responsible for investment results?

Answer: The other fiduciaries of the plan would not be liable as fiduciaries for either the selection of the investment manager or investment adviser or the results of the investment manager’s decisions or investment adviser’s recommendations.

  • Does the plan fiduciary have any obligation to advise the participant about the investment manager or investment adviser or their investment decisions or recommendations?

Answer: Plan fiduciaries do not have any obligation to advise the participant about the investment manager or investment adviser or their investment decisions or recommendations. See 29 CFR § 2550.404c-1(f)

  • Can the advisers services be paid out of the participants account?

Answer: Although this is not to be used as a legal opinion and needs to be addressed by appropriate legal counsel we are of the opinion this service  should not be permitted to be paid out of plan assets. This would require the approval of an “inside” fiduciary.  Fiduciaries may then be responsible for overseeing the advisers services as it does all other CSP’s of the plan.  In conforming with 408(b)(2) a plan sponsor is responsible for evaluating that all expenses paid out of plan assets be reasonable within the context of the services provided.  We believe allowing payment out of the participants account would impact the liability protection the plan sponsor might other wise receive. 

Advisory Opinion 2005-23A footnotes that “Other fiduciaries of the plan may have co-fiduciary liability of the plan if, for example, they knowingly participate in a breach committed by the participant’s fiduciary. ERISA section 405(a)”

Does the Institute hire on as the “Named Fiduciary”?

The Institute does not serve as the “Named Fiduciary”, but it may be named in the plan documents as the Plan Administrator. The “Named Fiduciary” is either a person or the business named in the plan documents as the primary responsible party or party’s for all aspects of the plan. The Institute doesn’t need this level of authority to to fulfill its role as an Alternative Professional Plan Sponsor Solution.  There is no benefit to the plan or participants and beneficiaries for the Institute to be the “Named Fiduciary” in the plan document and may be a detriment for the following reasons.

  • If the Named Fiduciary role is not properly defined, an outside fiduciary could go unchecked because it is the ultimate authority, potentially resulting in the mismanagement or intentional abuse of plan assets. Without naming names there is a well publicized case where an independent “Named Fiduciary” went rouge, taking advantage of its authority, using plan assets for its own personal benefit.
  • Maintaining the documents is an expense born by the plan sponsor. There is typically an additional expense each time a name is added or removed from the Plan document.
  • There is the additional expense for providing participants with a copy of a new Summary of Material Modifications.
  • Keeping the “Named Fiduciary in the corporate form can provide certain protection from personal liability, but that corporate structure must be in place, in operation and maintained.  Moreover, the Named Fiduciary can appoint others to provide various levels of support, both fiduciary and non-fiduciary in nature.
  • There is also the possibility that adding an independent fiduciary as a “Named Fiduciary” could change a prototype document into a custom document, adding additional expense to maintain the plan.

Does the Institute work with Broker Dealers and its Advisors?

Yes it does. The Institute has a program specifically designed to serve as a compliance solution that serves to keep Advisors from ever becoming a Fiduciary.

Does the Institute hire on as a Trustee?

No, the Institute does not hire on as a Trustee.  Some independent fiduciary service providers sign on as a Named Fiduciary to become the de facto Trustee. This circumvents the registration requirements to be a discretionary investment manager under ERISA section 3(38).  This could be problematic if the plan sponsor or independent service provider is not aware of any special requirements required by the plan sponsors state for anyone that serves as an independent trustee.  For example some state(s) require an independent trustee to be licensed as a Trust Company.

There are two exceptions to the general rule that the plan Trustee has exclusive authority and discretion over the management and control of plan assets.

(1) where the trustee is a “directed trustee” – meaning the trustee acts on the direction of a Named Fiduciary that has discretionary authority over the disposition or management of the plan assets;

(2) where the Named Fiduciary (usually the plan sponsor or plan committee) delegates the management of plan assets to one or more investment managers.

Our arrangement falls under exception # 2.

Is an IPS (Investment Policy Statement) required?

No. It is not required by law. The IPS is a dual edge sword. On the one hand it can be an effective tool to help those responsible for investment selection to define their goals and objectives and stay on point with respect to the plan’s investments. On the other hand if the IPS is too strictly written, the investments won’t have the flexibility to withstand short-term periods of above normal volatility or under performance. A good investment may for a period of time fall outside the parameters as defined by the IPS. This may require the committee to make changes more frequently, requiring good funds to be changed unnecessarily. Failing to follow the IPS could result in a fiduciary breach. With that being said the more that is put in writing the more it can be held against you.  Thoroughly documenting your investment selection process over time is equally and maybe more effective towards reducing your fiduciary liability.

Is it necessary for a covered service provider to carry fiduciary liability insurance?

If the CSP is serving in a fiduciary capacity or it is believed that they are providing advice that may make them a functional fiduciary then they should be required to maintain a fiduciary liability insurance policy. The Retirement Readiness Institute carries its own fidelity bond and fiduciary liability insurance policy.

Do Plan Sponsors need to be concerned with testing employee after-tax
contributions in a safe harbor 401(k) plan?

Yes, despite the safe harbor design, the after-tax contributions are still subject to the actual contribution percentage (ACP) test.

What are the fiduciary responsibilities regarding contributions?

If a plan, such as a 401(k) plan, provides for salary reductions from employees’ paychecks for contribution to the plan, then the employer must deposit the contributions in a timely manner. Published 1/14/2010 the DOL published a final rule to protect employee contributions deposited to retirement and health plans with fewer than 100 participants by providing a safe harbor period of (7) business days following receipt or withholding by employers.

The law provides a definition of what is timely.  It requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. However, it is very important to note, that if employers can reasonably make the deposits sooner, they are required to do so.

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When does an advisor's “added value” become a Plan Sponsor liability?

More and more employers are offering participants help with making informed investment decisions. This may or may not be a fiduciary function, depending on the type of information provided.

Employers may decide to hire an investment adviser to offer investment advice tailored to individual participants. These advisers are fiduciaries and have a responsibility to the plan.

A word of caution, an advisor not properly contracted to provide investment advice yet meets with participants as an added value, providing investment advice specific to the participant’s 401(k) account, may be acting in a functional fiduciary capacity, unknowingly creating responsibilities and risks for the plan sponsor.

However, if an employer or service provider provides financial and investment education that is general in nature, it is not acting as a fiduciary.  This may include interactive investment materials or information based on asset allocation models. But a word of caution, any services, materials or interactive technology relating to non-plan related topics, paid directly or indirectly out of plan assets could be problematic i.e. personal finance videos, information or education.

The decision to select an investment advisor or service provider offering investment education is a fiduciary act and must be carried out in the same manner as hiring any other plan service provider.

What help is available for employers who make mistakes in operating a plan?

The Department of Labor’s Voluntary Fiduciary Correction Program (VFCP) encourages employers to comply with ERISA by voluntarily self-correcting certain violations. The program covers 19 transactions, including failure to timely remit participant contributions and some prohibited transactions with parties-in-interest. The program includes a description of how to apply, as well as acceptable methods for correcting violations. In addition, the Department gives applicants immediate relief from payment of excise taxes under a class exemption. 

In addition, the Department’s Delinquent Filer Voluntary Compliance Program (DFVCP) assists late or non-filers of the Form 5500 in coming up to date with corrected filings.

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