The 401(K) has replaced the old dinosaur of pensions in most company retirement plans, allowing employees to defer salary into a retirement plan, and companies often offer a match as an incentive to contribute. The control has shifted to the employee, but there is still a great responsibility on the employer to be a fiduciary. Employers are now asking lots of questions about these fiduciary responsibilities with the plans being offered. If your company is sponsoring a 401K, be sure you ask these questions. Watch your language, and make sure you know how to use the “F” word properly.
1. Am I, the employer, a fiduciary?
If it walks and talks like a duck...guess what?!?! Yes, it’s a duck. A 401(k) plan sponsor is always a fiduciary. As a general rule, anyone employed by a plan sponsor who acts in a fiduciary role with respect to the retirement plan is a plan fiduciary. Acting in a fiduciary role mostly means that an individual may exercise discretion with regard to the plan. This means that even members of the investment committee are fiduciaries, as are anyone who exercises discretion in the 401(k) plan.
2. My boss appointed me to our plan's investment committee even though I don't really know what I’m doing. Am I still a fiduciary?
Absolutely. Not only are you a fiduciary, but so is your boss! Anyone who has the ability to appoint a fiduciary is also a fiduciary. Although you may not know what you’re doing or have the time to serve, you are still very much a fiduciary. Not attending investment committee meetings will not pardon you from your fiduciary responsibility either. And, resigning from the investment committee without finding a replacement is also a big no-no.
3. Is our investment advisor a fiduciary? How would I know?
This is where it gets interesting. It is very odd for an investment advisor not to be a fiduciary to the 401(k) plans they work with. However, it is possible. The best place to look is the contract you signed with your advisor. If they are a fiduciary there will be language stating that they are an ERISA Section 3(38) or 3(21) fiduciary. If you can’t find that sort of language, call your advisor and ask. If they are not a fiduciary, you should seriously think about hiring a different advisor.
4. I already know my investment advisor is a fiduciary. Do I still have to be one?
You might as well walk around with the scarlet letter “F” around your neck. A plan sponsor can never offload its fiduciary responsibility. However, you can share the “F” necklace with others, and you probably should. This is a good move since it allows more fiduciaries to share the financial responsibility.
5. Our plan's recordkeeper and our attorney have to be fiduciaries, right? They always keep us out of trouble anyway.
This all comes down to the “D” word. Do they have discretionary authority? If neither has discretion, then they are not likely to be fiduciaries. Your plan's custodian, accountant, payroll company and any consultants are probably not fiduciaries either.
6. What happens if one of the funds our investment committee chose lost money? Am I responsible for the loss?
Fiduciaries are not responsible for insuring investment performance. Assuming everyone on the investment committee acted prudently when choosing and monitoring the fund, the answer would be no.
7. Some of the prior fiduciaries to our 401(k) plan didn’t do a very good job choosing investment funds. Could we be liable, even if we weren't involved in selecting those funds?
Possibly – especially if you still offer the fund. If proper due diligence was not exercised by the prior fiduciaries, then current fiduciaries are not exempt from responsibility if you decided to continue to offer the fund.
8. Our rule of thumb is to always do what our investment advisor tells us to do. This way, there could never be a fiduciary breach, right?
Sorry, Charlie. Although there is no expectation to have the knowledge of an expert, you still have to do your homework. In fact, failing to exercise proper due diligence when reviewing a recommendation made by an expert may lead to liability.
9. Is there any way to manage fiduciary risk and the associated liability?
Yes, there are many. Your employer should have fiduciary liability insurance and your plan should also have an ERISA fidelity bond. You can also outsource for co-fiduciary services and decide to comply with a number of the safe harbors offered by the regulations.
10. Are there some places I can brush up on my knowledge of Fiduciary Responsibilities?
Here are a few that are very helpful.
Meeting Your Fiduciary Responsibilities, from the US Department of Labor website
Retirement Plan Fiduciary Responsibilities, from the IRS website
Cristofer Cabanillas CFP®, AIF® is an investment manager and partner of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Cris Cabanillas, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.