The Power of the PENsion: Am I a Plan Fiduciary? What Does That Mean?

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If your job responsibilities include involvement with an employee benefit plan, you may be a fiduciary, and so might others be who help manage the plan or its assets. Given that, it is important to know what a fiduciary is, who is deemed to be a fiduciary, and what the responsibilities are under ERISA (the Employee Retirement Income Security Act).

The term “fiduciary” is taken from the Latin word “fidere” which essentially means to trust – trust in one who acts in good faith on behalf of another. Black’s Law Dictionary defines a fiduciary as “a person or institution who manages money or property for another and who must exercise a standard of care in such management activity imposed by law or contract,” which is a key concept impacting employee benefit plans under ERISA.

Fiduciary Status – What’s in a Name?

ERISA requires every employee benefit plan to have at least one “named fiduciary” who has the authority to control and manage the operation and administration of the plan. A named fiduciary is identified in the plan document.

If you aren’t a named fiduciary, you may still be considered a fiduciary under a functional test outlined in ERISA. Specifically, ERISA Section 3(21) provides that a person is a fiduciary with respect to an employee benefit plan to the extent such person does any of the following:

• exercises any discretionary authority or control over the management of a plan, or over the management or disposition of plan assets;
• renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan; or
• has any discretionary authority or discretionary responsibility in the administration of such plan.

The company that sponsors a plan is typically a fiduciary by reason of being the named fiduciary, but  may also qualify as a fiduciary under the functional test. For example, it would satisfy this test if it selects and monitors the plan investment committee members and third-party investment advisor. Individuals within the company (e.g. corporate officers, members of a board of directors, or other employees) are not considered a fiduciary based upon job title but may qualify as one if they perform any of the actions listed above in the functional test.

An investment advisor is a fiduciary who provides investment advice and recommendations to the plan sponsor, but the final decision-making authority generally remains with the plan sponsor. This means that the advisor provides guidance and recommendations, but the plan sponsor retains ultimate responsibility for the investment decisions.

Whereas an investment advisor’s focus is providing advice and recommendations, ERISA Section 3(38) defines an “investment manager” as any fiduciary other than a trustee or named fiduciary who “has the power to manage, acquire, or dispose of any asset of a plan.” In other words, an investment manager is a fiduciary who has been appointed to have discretionary authority and control to make the actual investment decisions including selecting or removing the investments in a plan. Unlike the purely functional test of ERISA Section 3(21), there are several specific requirements that must be met in order to qualify as an investment manager: only certain types of financial organizations may be appointed as an investment manager and the fiduciary status must be acknowledged in writing.

It should be noted that a person is only a fiduciary to the extent that they are performing a fiduciary activity. The fact that someone is a fiduciary with regard to one activity does not necessarily mean they are a fiduciary with regard to all activities dealing with a plan. When the function is ministerial or settlor in nature, the individual would not be considered a fiduciary with regard to that specific function. Ministerial functions are those that do not entail discretionary authority or responsibility (e.g. applying rules to determine eligibility for participation or benefits). Settlor functions are business decisions that may be made by a plan sponsor (e.g. establishing or terminating a plan).

Obligations of a Fiduciary

ERISA establishes four primary duties for fiduciaries. As a fiduciary, you must:

• Act for the exclusive purpose of providing benefits to plan participants and their beneficiaries and defray reasonable expenses in administering the plan;
• Exercise the same care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would exercise in the conduct of an enterprise of a like character and with like aims;
• Diversify plan investments to minimize the risk of large losses; and
• Act in accordance with the documents and instruments governing the plan.

Why it Matters

A fiduciary may have personal liability for breaches resulting from their own actions, and in some cases, the actions of co-fiduciaries. Because fiduciary status may be based on a person or organization’s conduct rather than title, and without regard to whether the person recognizes or accepts that status, it is possible to be a fiduciary without being aware of it. That can be problematic given the potential liability.

Understand Your Responsibility. We Can Help.

Named fiduciaries and those with a functional fiduciary status cannot sidestep oversight responsibility. While ERISA permits named fiduciaries to delegate to other fiduciaries, this does not remove all fiduciary responsibility. The ultimate responsibility to monitor these fiduciaries and protect plan participants remains with the named fiduciary. Understanding and knowing your fiduciary responsibilities is essential for the health and well-being of the plan and its participants.

Highland, whether in an investment advisor or investment manager role, is a fiduciary for our clients. We stand behind our clients as they perform their fiduciary responsibilities. Highland continues to be your Investor Advocates®, just as we have for more than 30 years.

If you’d like to talk further about your fiduciary responsibilities and how Highland can support you, contact Mike Paolucci, mpaolucci@highlandusa.net or 440-808-1500.

 Highland Consulting Associates, Inc. was founded in 1993 with the conviction that companies and individuals could be better served with integrity, impartiality, and stewardship. Today, Highland is 100% owned by a team of owner-associates galvanized around this promise: As your Investor Advocates®, we are Client First. Every Opportunity. Every Interaction.

Highland Consulting Associates, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer of solicitation for the sale or purchase of specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.