Part 1 of Fiduciary Responsibilities Under ERISA and the Internal Revenue Code

Fiduciary Relationships Explained

A fiduciary relationship is created when one person holds and manages property that belongs to another. Thus, in a funded employee-benefit plan, fiduciary relationships are critical. Plan assets are held for the benefit of plan participants and beneficiaries by an employer-directed trustee or insurance company. Although state law usually governs fiduciary rules, federal laws (particularly ERISA) impose additional fiduciary standards that supersede state law.

Who Can Be A Fiduciary?

A fiduciary means any individual who:

• Exerts discretionary authority/control over management of the plan/its assets;

• Provides investment advice for a fee concerning any asset of the plan; or

• Has discretionary authority/responsibility in administration of the policy.

This broad definition encompasses an employer, a plan administrator/trustee as well as others who participate in managing such plans. On the other hand, attorneys, accountants, actuaries, and consultants providing professional services shall not be classified as fiduciaries solely because they render these types of service. Broker dealers, banks, and reporting dealers are also excluded unless they provide investment guidance.

Named Fiduciary Requirement

Each plan must name a “named fiduciary” within its document to ensure participants and government know who is ultimately responsible for it. Other fiduciaries may also be liable.

Duties Of A Fiduciary

• To act solely on behalf of participants and beneficiaries;
• Provide benefits while defraying administrative expenses related to them;
• Act with carefulness, skillfulness, prudence, and diligence under prevailing circumstances;
• Unless imprudent, diversify investments so as to minimize large losses.
• Follow documents governing plans unless inconsistent with ERISA requirements.

Prudent Man Rule

In making investments, fiduciaries must ensure that those investments are reasonably designed to further such purposes or objectives. They should take into account:

1. Composition/diversification – portfolio;
2. Liquidity/return relative to cash flow needs; and/or
3. Projected return versus funding goals/objectives etcetera.

Employer Securities & Real Property

Holdings of securities issued by employers along with real estate represent major exceptions from this general rule regarding diversification. Such assets can be held without limit only in certain eligible plans like profit-sharing or employee stock ownership ones.

Delegating Fiduciary Responsibilities

A fiduciary may delegate responsibilities but only after careful selection and supervision of the appointees. This means that a fiduciary is still liable for the breach committed by its co-fiduciaries if they:

• Take part in or conceal a violation.
• Facilitate a violation through their own fiduciary failures.
• Know about a violation and do nothing to fix it.

Employers should make sure that their liability insurance covers fiduciary responsibilities as well. Although ERISA prohibits exculpating fiduciaries from liability, insurance and employer indemnification are allowed.