If you’re a financial advisor, you’re familiar with the term fiduciary. You know about the fiduciary standard versus the suitability standard, and you likely followed along closely as the Department of Labor tried to roll out their Fiduciary Rule a couple of years ago.
When it comes to retirement plans, though, your understanding of what a fiduciary is may not be accurate. Whether or not you’re a fiduciary for a retirement plan isn’t based on whether you work for a broker-dealer or an independent RIA. The term fiduciary takes on a whole new meaning where retirement plans are concerned, due to the Employee Retirement Income Security Act, also known as ERISA.
What Is An ERISA Fiduciary?
A fiduciary is generally someone who exercises discretionary authority or control over a plan’s management or assets. That includes anyone who provides investment advice to the plan. As such, while you may not be held to the fiduciary standard as a financial advisor, you could still qualify as a fiduciary under ERISA based on the services that you provide to a retirement plan.
There is a liability that comes along with being an ERISA fiduciary. That is your legal responsibility to work in the best interest of the plan’s beneficiaries and safeguard their assets. A fiduciary must:
- Act solely in the interest of plan participants and their beneficiaries
- Carry out duties prudently
- Diversify plan investments
- Follow the plan documents
Being an ERISA fiduciary is a serious undertaking because a breach of fiduciary duty can result in being held personally liable for losses and lost opportunity costs, being required to pay attorney’s fees, and subjection to Department of Labor civil fines or excise taxes.
Types Of ERISA Fiduciaries
There are a number of different kinds of ERISA fiduciaries, called by different terms based on how they are identified in ERISA itself. Every retirement plan has a named fiduciary, often the sponsoring company, who is ultimately responsible for the plan. The named fiduciary is able to delegate responsibility and fiduciary liability to others, but they can never be completely rid of their own fiduciary responsibility. There may also be co-fiduciaries, functional fiduciaries, and trustees that all are considered ERISA fiduciaries.
Three parts of ERISA name another three kinds of fiduciaries, labeled based on the part of the code that describes them. A 3(16) fiduciary helps with plan administration and operation. A 3(21) fiduciary is an advisor who provides investment advice to clients. A 3(28) fiduciary is the plan’s investment manager.
Not All Service Providers Are Fiduciaries
An ERISA fiduciary is legally responsible to act solely in the plan beneficiaries’ best interest and carry out their duties prudently. For many plan sponsors, that requires that they delegate responsibilities since they do not have the knowledge or expertise to administer the plan alone.
Not all parties that help to administer a retirement plan are fiduciaries. Fiduciary status depends on the responsibilities taken on and the particular arrangement. Because of this, some retirement plan service providers are able to avoid fiduciary liability even if they appear to be acting in a fiduciary capacity.
Why does it matter if a plan service provider is a legal fiduciary or not? If the service provider is a fiduciary, they are legally liable for their actions and advice. If the service provider is not a fiduciary, then the legal responsibility falls on the plan administrator or the person that delegated the task to that service provider. It is not uncommon for a plan sponsor to mistakenly believe that they are working with a fiduciary service provider only to discover when there is a problem that they, in fact, carry all of the liability for that provider’s actions.
It is important for a plan sponsor to understand which of their service providers are acting in a fiduciary capacity and which are not. In fact, it is a part of their fiduciary duty to know that!
How We Can Help
Unfortunately, it can be difficult at times to identify which service providers are true fiduciaries. However, it is vital for plan sponsors to have a solid understanding of which fiduciary duties they have successfully delegated and which ones they have retained.
If you have clients that sponsor retirement plans, we are here to help them. We can partner with you to help them determine which of their service providers really are ERISA fiduciaries and can also offer fiduciary services if they are looking to delegate some of their responsibilities. Email me today at firstname.lastname@example.org to find out more.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.