Wednesday, July 2, 2014

Be Cautious of Offers to Pass the Fiduciary Buck

The term “fiduciary” is certainly one of the lightning-rods of these times in our industry.  In a period of intense scrutiny of the management and operation of retirement plans, and the arrangements between plans and those who provide services to them, to be a fiduciary is to be under a regulatory and legal microscope.  One need look no further than the dockets of our district and appeals courts, or the news releases published by the Department of Labor (DOL), to conclude that a great deal of time and energy go into policing retirement plans.  Unfortunately, even the most honest and well-intentioned plan administrators and service providers can be exposed to lawsuits or regulatory sanctions for outcomes seen as or alleged to be damaging the interests of benefit plan participants.  And, when the layers of the legal or regulatory onion are peeled away, “fiduciary” is as often as not at the core.
The most high-profile regulatory event of these times is the effort by the DOL’s Employee Benefits Security Administration (EBSA) to issue regulations defining who should be considered a fiduciary with respect to retirement plans, and the standards to which they will be held.  These regulations have several times been delayed, and it is unclear when, or if, they will ultimately be issued.  But, with or without such regulations, the mandates of the Internal Revenue Code and ERISA, and the eagerness with which lawsuits alleging fiduciary breaches are filed, already are enough to make potential plan fiduciaries uneasy. 

Given the demonstrated responsibility and related risk in being a fiduciary to a retirement plan, it’s not too surprising that some enterprising individuals and companies are offering themselves as solutions to this risk.  And, also not surprising, some employers, fearful of the risks accompanying fiduciary status, are listening.  They recognize that they don’t necessarily understand their obligations and responsibilities and the prospect of insulating themselves from risks involved in administering a retirement plan is appealing.  And in many cases, a course of action that results in the plan fiduciary hiring an expert is in the best interest of both the fiduciary and plan.  This said caution and understanding on the part of the plan fiduciary is still needed.
The most aggressive of these fiduciary service marketers propose to transfer all employer fiduciary risk to themselves by the delegation of certain functions that may include plan administration, investment management or a combination thereof.  With all fiduciary obligation for those functions lifted from the employer’s shoulders, they claim, the employer can focus on making their enterprise successful, rather than on the sometimes-indecipherable details of employee benefit administration. 

The marketing pitch is likely to contain official-sounding references to one of several classes of fiduciary, and tout the level of protection – even immunity – that the fiduciary service provider can give the employer.  But, whether the marketer presents itself as a 3(16) fiduciary, a 3(21) fiduciary, a 3(38) fiduciary, or what-have-you, there is one inescapable fact that often times you will not see prominently advertised.  While a service provider can take on fiduciary liability by the tasks it performs, the employer is always ultimately responsible for fiduciary decisions.  That’s because it is under the employer’s ultimate fiduciary authority that entities such as investment managers, third-party administrators, or those who only perform ministerial functions, and all who serve the plan, are chosen.   The employer is ultimately responsible for the providers they appoint to fulfill these roles and has an ongoing obligation to monitor the actions of each provider.  While use of experts to fulfill these roles is often a prudent course of action for the plan fiduciary, they must always remember that their fiduciary obligation doesn’t end with this appointment. 
When you dig deeper into the fine print of some of these fiduciary promotions you will typically find disclaimers.  These disclaimers, when interpreted with only a modicum of legal expertise, make it all too clear where the buck stops. It stops with the employer.  It is imperative that an employer understand exactly what is being provided and any limitations when choosing to use these types of fiduciary services.  All else being equal, an employer will be in better hands working with an administrator or service provider that acknowledges an employer’s fiduciary risk – and will help limit it through good services and administration and in some cases may even assume some of that risk – rather than someone who proposes to eliminate it all and doesn’t provide the entire fiduciary story.