Managing Fiduciary Liability
Terrence M. Burns, CPA, MSA I Supervisor
Fiduciary Responsibility: The fiduciary of a retirement plan is the person that has a responsibility to act in the best interests of the plan’s participants and beneficiaries. According to the Department of Labor, basic fiduciary duties include:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
- Carrying out their duties prudently
- Following the plan documents
- Diversifying plan investments
- Paying only reasonable plan expenses
Managing Liability: Fiduciaries can hire service providers to help manage the plan, but a fiduciary does not entirely eliminate its liability by doing so. Even just the decision to hire a service provider requires the fiduciary to complete due diligence regarding the potential provider, and the fiduciary retains an obligation to continually monitor the provider’s performance and good standing. There are three main categories of fiduciaries that service providers fall into once contracted: 3(16), 3(21), or 3(38).
ERISA 3(16) Fiduciary
An ERISA section 3(16) fiduciary acts as the plan administrator, and is charged with handling the everyday operation of the plan. The plan administrator’s responsibilities are mainly defined by the plan document and ERISA, but some examples include: maintain all necessary records, file Form 5500, and determine employees’ eligibility. The named fiduciary has the ability to hire a 3(16) contract fiduciary or a third party administrator to perform the administrative functions for the named fiduciary. A 3(16) contract fiduciary may have the ability to stand in the shoes of the named fiduciary and take on that fiduciary liability. The Plan Sponsor would however, still have the duty to select and monitor the service provider. Care should be taken to review the contract with the service providers/third party administrators that claim they will act as a 3(16) fiduciary to determine what services they will take on and the limit of the fiduciary liability they will assume.
ERISA 3(21) Fiduciary
As defined in Section 3(21) of ERISA, a person is a plan fiduciary if that person provides investment advice for direct or indirect compensation. Most contracts with an ERISA 3(21) fiduciary will explicitly state that the fiduciary’s responsibility is to make recommendations or advise the plan sponsor with investment management. These functions are performed by a 3(21) fiduciary under a limited scope, but many 3(21) fiduciaries take on a co-fiduciary role as they provide documentation necessary to hold up under DOL inspection.
ERISA 3(38) Fiduciary
Section 3(38) of ERISA defines the term “investment manager” as any fiduciary who has the power to manage plan assets, is also a register investment adviser, bank, or insurance company, and has agreed that he/she is a fiduciary with respect to the plan in writing. An ERISA 3(38) fiduciary has more legal responsibility than a 3(21) fiduciary, since a 3(38) fiduciary has the discretion to make decisions, and a limited scope 3(21) fiduciary makes recommendations to the plan sponsor. Plan sponsors often make assumptions when engaging service providers, and only when problems arise do they realize that they are still liable. Because of this, plan sponsors and fiduciaries are encouraged to thoroughly review agreements with service providers to understand each party’s respective responsibility and liability.
For more information or help navigating employee benefit plan reporting requirements, please call us at 585–427–8900.
Terrence M. Burns: Terrence M. Burns, CPA, MSA, is a Supervisor in EFPR Group’s Attest department. Terrence has acquired experience in numerous industries including: manufacturing, technology, energy, not-for-profit organizations, and public companies. He prepares and reviews financial statement audits, reviews, and compilations for a variety of clients. Other responsibilities include: inventory observations, risk assessment, bookkeeping, Form 990’s and financial statement preparation.