ERISA's definition of "fiduciary" basically encompasses three categories of responsibility or activities with respect to an employee benefit plan. In addition to anyone who is specifically named as a fiduciary by the terms of an ERISA plan, a person is a fiduciary of a plan to the extent that he or she:
- Exercises any discretionary authority or responsibility in the administration of the plan.
- Exercises any authority or control concerning the management and disposition of plan assets.
- Renders investment advice with respect to plan assets (or has any authority or responsibility to do so) for a fee or other compensation, other than regular compensation received as an employee of the plan sponsor.
A person's status as a fiduciary depends more on his function, authority and responsibility rather than his title or label. It is clear, however, that certain individuals become fiduciaries by virtue of their position with respect to a plan's operation (e.g., trustees or members of an investment committee are inherently vested with discretionary authority in the administration of the plan or the management of plan assets).
What Are The Duties Of An ERISA Fiduciary?
- ERISA imposes upon each fiduciary the broad responsibility of discharging his duties, solely in the interests of plan participants and beneficiaries. His exclusive purpose is providing benefits to participants and their beneficiaries, and defraying reasonable plan expenses. This is the "exclusive benefit" rule and imposes a duty of loyalty. Beware of compromises whenever the interests of the fiduciary (as a participant or as owner of the plan sponsor) conflict with the interests of participants. If there is such a conflict, the plan fiduciary must discharge his duty of loyalty to the plan participants, and not to its sponsor.
- ERISA also requires that a fiduciary act with the care, skill, and diligence of a prudent man under similar circumstances (the famous "prudent man" rule). This requirement is a little more exacting than the prudent man rule for regular non-ERISA trusts. It specifically takes into account the nuance and special characteristics of employee benefit plans, as opposed to personal or estate planning trusts. A number of commentators have suggested that under the prudent man standard, the plan trustee must adopt and implement prudent methodology for dealing with issues and problems facing him as a plan trustee. Once again, it's less important whether you win or lose than how you play the game.
- A fiduciary must also diversify plan investments, so as to minimize the risk of large losses, unless under the circumstances that is clearly prudent not to do so. This is the "diversification" rule. One way to meet this rule is to invest plan assets in a bank's pooled investment fund, a mutual fund, or an insurance or annuity contract if the bank, mutual fund, or insurance company diversifies its investments.
- Finally, a fiduciary must discharge his duties in accordance with the governing plan documents and instruments, insofar as they are consistent with the provisions of Title I of ERISA. This is aptly labeled the "plan conformity" rule.
What Happens If A Fiduciary Breaches These Duites?
A fiduciary may be held personally liable for any losses resulting from the fiduciary's breach of duty. Furthermore, any profits obtained by the fiduciary through the improper use of plan assets must be turned over to the plan.
What If A Fiduciary Gets In Over His Head?
If a fiduciary does not have the necessary investment expertise, it is probably desirable to obtain professional advice with respect to plan investments. Another option: delegate certain fiduciary duties to those more qualified. For example, a trust agreement can provide that one trustee has responsibility for one-half of the plan assets, and a second trustee has responsibility for the other half. In this case, neither trustee would be liable for the acts of the other trustee, unless he had knowledge of a breach of duty, and failed to make an effort to remedy the situation. It is also possible for co-fiduciaries to allocate responsibilities between or among themselves. This also insulates a fiduciary from the acts of his co-fiduciaries. The plan must, however, specifically allow such an allocation of responsibilities.
A named fiduciary who has control or management over plan assets may delegate his responsibility by appointing a qualified investment manager, to manage all or part of the plan assets. This also insulates the named fiduciary, as long as he acts prudently in choosing and retaining the investment manager. A named fiduciary is not relieved of his responsibility merely because he or she follows the advice of an investment manager.