Tuesday, June 9, 2009

Fiduciary Delegation - Myth or Reality?

I get asked about this quite often, so I thought it would be a good topic for discussion here. Specifically, the question that I get asked is whether or not Fiduciary Liability (not responsibility or status) can in fact be transferred from a Plan Sponsor or business owner onto another entity or not. Below, I will try and tackle this question appropriately so that it makes sense for all who may be interested.

The notion that fiduciary responsibility and liability cannot be delegated is explicitly false under law. ERISA itself makes this clear, DOL regulations make it clearer, and case law reinforces it. The most obvious way to delegate is simply to hire someone else to be in charge. For example, when one of our clients prudently hires and monitors Unified Trust as discretionary trustee, the client should be able to effectively delegate much of its fiduciary responsibility with respect to plan assets and the client should not be liable for Unified’s acts and omissions as discretionary trustee. The client simply has a fiduciary responsibility to prudently hire and appoint Unified and to monitor our performance as discretionary trustee.

Another path to delegation is through an ERISA investment manager. ERISA section 3(38) defines an investment manager as any fiduciary (other than a trustee or a named fiduciary):

  • who has the power to manage, acquire, or dispose of any asset of a plan;
  • is a Registered Investment Advisor (RIA), bank or insurance company;
  • has acknowledged in writing that he/she is a fiduciary with respect to the plan.

A named fiduciary can appoint and delegate certain plan functions to an investment manager (pursuant to ERISA section 402(c)(3)) and not be liable for the acts and omissions of the investment manager (pursuant to ERISA section 405(d)(1)). Of course, the one caveat is that the appointment of the investment manager must be prudent and this responsibility lies solely with the appointing fiduciary, typically the Plan Sponsor. Click here to read an article previously published in the Journal of Financial Planning that goes into detail on this very topic and how it can benefit Plan Sponsors.

To Summarize:
Myth – You Can’t delegate fiduciary responsibility

  • This is false. Delegation is perfectly legal under ERISA……just rarely done in actual practice.
  • Several sections under ERISA specifically outline how delegation would occur. These are sections 402c, 403a, 405(c)(1)/405(c)(2)/405(d)405(c)(1)/405(c)(2)/405(d)(1).

402(c) – Formally Divides duties among named fiduciaries
403(a)1 – Formally delegate to a Corporate Trustee
403(a)2 and 402(c)(3) – Formally delegate to an Investment Manager
405(c)(1)/405(c)(2)/405(d)(1) – Formally delegate duties of a named fiduciary to another fiduciary (who is not named) – I.E. Independent Fiduciary
405(d)(1)) – “named fiduciaries are not liable for the acts and omissions of other named fiduciaries” if those fiduciaries have been prudently appointed and retained.

  • Based on the above if the plan sponsor delegates the role of trustee to a Corporate (fully discretionary) trustee and does so prudently, that plan sponsor is not responsible for the acts and omissions of that trustee. This includes the delegation of prudently selecting and monitoring investments.
  • Bottom-Line – No one can fully remove the Plan Sponsor’s fiduciary role or ALL of its responsibilities, but parts of it can be outsourced to professional fiduciaries including the role of discretionary trustee. The client in this environment transfers liability to this discretionary trustee. This is generally a good thing. The client is still the Plan Sponsor and named administrator and thus is still responsible for settler/ministerial functions as well as prudently hiring and monitoring service providers including the outsourced trustee service.