W. Scott Simon
In this month’s column, I thought it might be interesting to provide advisors with some essential information about the meaning of fiduciary status under the Employee Retirement Income Security Act (ERISA).
Different Kinds of Plan Fiduciaries
ERISA, which governs qualified retirement plans such as 401(k) plans, makes clear that certain fiduciaries–including named fiduciaries, the plan administrator, and trustees–will “run” a plan.
A named fiduciary is the chief decision-maker in a plan. It retains, evaluates, and monitors plan fiduciaries and plan service providers, and consequently fiduciaries and service providers must report to the named fiduciary. In the typical 401(k) plan, the sponsor of the plan (i.e., the employer)–or more precisely some executive employed by the sponsor–is the named fiduciary.
The plan administrator is essentially a coordinator of communications in a plan. It has responsibility under ERISA for making important disclosures to plan participants such as summary plan descriptions, notices, and statements. It also has statutory responsibility for ensuring that all filings (e.g., Form 5500s) with the federal government are timely made. In the typical 401(k) plan, either the plan sponsor or some executive employed by the plan sponsor is the plan administrator.
A plan trustee is the fiduciary solely responsible and liable for a plan’s investment options. In the typical 401(k) plan, a plan trustee is an employee of the plan sponsor.
The Plan Sponsor as Default Fiduciary
ERISA, which governs qualified retirement plans such as 401(k)s, makes clear that certain fiduciaries will “run” a plan. For example, ERISA section 402(a) provides, among other things, that an employee benefit plan must be established and maintained pursuant to a written instrument. This instrument, also called a “plan document” or “plan instrument,” must provide for one (or more) named fiduciaries and endow same with the authority to control and manage the operation and administration of the plan. (The “trust instrument” or “trust document,” in contrast, pertains to the plan trust.) A plan’s named fiduciary must be named either in the plan document or designated through a procedure specified in the plan document. (DOL Advisory Opinion 2002-06A, July 3, 2002.)
Suppose, though, that a named fiduciary is neither named in the plan document nor designated by a procedure specified in the plan document. In any ensuing lawsuits by plan participants (or regulators) against a plan’s sponsor, the court in its efforts to sort out responsibilities and assign liabilities would no doubt hold the sponsor to be the named fiduciary. While the naming or designation of a plan’s named fiduciary is mandatory, note that ERISA doesn’t require the plan administrator to be named or designated pursuant to a procedure specified in the plan document. Indeed, the plan sponsor can become the plan administrator by default with no act otherwise necessary.
In either case–when a named fiduciary must be named/designated under ERISA section 402(a) (but isn’t) or when the plan administrator need not be named/designated under ERISA section 3(16) (and isn’t)–ERISA presumes, by default, that the plan sponsor will be a named fiduciary and the plan administrator, and will be required to assume all the fiduciary duties and liabilities associated with each such fiduciary function. So in the absence of any language identifying a named fiduciary or the plan administrator, the plan sponsor is presumed to be both of these fiduciaries. A plan sponsor inherently wears the fiduciary hats of a named fiduciary and the plan administrator until other entities are otherwise named or designated pursuant to a procedure specified in the plan document. After all, plan participants must, upon examining the plan document, be able to ascertain who the heck is responsible for operating the plan. In most plan documents, of course, the plan sponsor is actually named or designated as both a named fiduciary and the plan administrator.
So much for a named fiduciary and the plan administrator. What about a trustee? In plans where no trustee has been named or designated, would the plan sponsor likewise become the trustee by default? No. Why? Because under ERISA, the Internal Revenue Code and the Internal Revenue Service rules, a qualified retirement plan cannot exist without a trust instrument (the only exception is a fully insured plan). And that instrument can bring a qualified retirement plan to life only when a trustee, identified in the plan document, executes it.
Determining ERISA Fiduciary Status
ERISA states that a trustee, a named fiduciary, the plan administrator, an investment manager or anyone else (as relevant) will be deemed to be a fiduciary of a qualified retirement plan to the extent that the person (1) exercises any discretionary authority or control in the management of the plan or disposition of the plan’s assets (ERISA section 3(21)(A)(i)), (2) can or does render investment advice for a fee (section 3(21)(A)(ii)) or (3) has any discretionary authority or control in administering the plan (section 3(21)(A)(iii)).
Note that the test for fiduciary status is a functional one. For example, anyone from the owner of a plan sponsor on down to the janitor could be deemed to exercise or have “any discretionary authority” with respect to the plan’s assets or administration of the plan. Under ERISA, it’s what an entity actually does with respect to a retirement plan–whether or not such acts are spelled out as duties in a written document–rather than any formal (or informal) title the entity may bear that will make it a fiduciary. As a result, the ERISA section 3(21)(A) functional fiduciary test is very broad. This statutory scheme is a reminder of the broad net cast by ERISA in making sure that anybody working at the employer level (irrespective of title) that has any discretion, or any advisor that has any discretion, will be deemed to be a fiduciary of a qualified retirement plan.
The assessment of whether or not an entity that deals with a qualified retirement plan is to be deemed a fiduciary under ERISA requires such entity, in effect, to first “run” at least one of the three preceding “gauntlets” laid out in ERISA section 3(21)(A). (Conversely, an entity unable to run any of these three gauntlets won’t be deemed to be an ERISA fiduciary.) This is true in cases where a particular ERISA statute doesn’t specify that an entity is a fiduciary and even in ones where it does.
In cases of the former, for example, ERISA section 3(16) says nothing about the plan administrator being a fiduciary. Instead, ERISA sections 103 and 104 require that the administrator assume certain duties such as any discretionary authority or control in administering the plan pursuant to ERISA section 3(21)(A)(iii). When the plan administrator assumes these duties, only then does it become a fiduciary. (Note 29 CFR 2509.75-8 Q&A D-3.) (The plan administrator fiduciary shouldn’t be confused with the non-fiduciary “third party administrator” servicing the plan.) Likewise, ERISA section 403(a) does not actually state that a trustee is a fiduciary. Instead, 403(a) requires that a trustee assume certain duties (i.e., any discretionary authority or control in the management of the plan or disposition of the plan’s assets) pursuant to ERISA section 3(21)(A)(i). When a trustee assumes these duties, only then does it become a fiduciary.
This “running” of the “gauntlets” laid out in ERISA section 3(21)(A) is also true even in cases where a particular ERISA statute actually specifies that an entity is a fiduciary. For example, ERISA section 402(a) states that a named fiduciary is a fiduciary. A named fiduciary has broad authority to control and manage the operation and administration of a retirement plan. This includes the ability of the named fiduciary to, for example, delegate fiduciary functions to the plan administrator or a trustee (or an investment manager pursuant to ERISA section 3(38)). Despite such vast authority, ERISA presumes that the named fiduciary must first qualify as a fiduciary under ERISA sections 3(21)(A)(i) and/or 3(21)(A)(iii). Likewise, section 3(38) identifies an investment manager as a fiduciary. Nonetheless, an investment manager must first qualify as a fiduciary under ERISA section 3(21)(A)(i) by assuming duties concerning any discretionary authority or control in the management of the plan or disposition of the plan’s assets.
The plan administrator, a trustee, a named fiduciary, an investment manager, or anyone else, as relevant, is therefore a fiduciary of a qualified retirement plan to the extent that it has responsibilities under any part of ERISA section 3(21)(A). Hence, the plan administrator pursuant to ERISA section 3(16) is also a section 3(21)(A)(iii) fiduciary (but a 3(21)(A)(iii) fiduciary won’t necessarily be the 3(16)). A trustee pursuant to ERISA section 403(a) is also a section 3(21)(A)(i) fiduciary (but a 3(21)(A)(i) fiduciary won’t necessarily be a 403(a)). A named fiduciary pursuant to ERISA section 402(a) is also a section 3(21)(A)(i) and/or (iii) fiduciary (but a 3(21)(A)(i) and/or (iii) fiduciary won’t necessarily be a 402(a)). And an investment manager pursuant to section 3(38) is also a section 3(21)(A)(i) fiduciary (but a 3(21)(A)(i) fiduciary won’t necessarily be a 3(38)).
A Note of Clarification
Regular readers of this column may notice this month that I have largely dispensed with attaching ERISA section numbers to different kinds of fiduciaries and stopped capitalizing their names. For example, I now refer to a named fiduciary instead of an ERISA section 3(21) Named Fiduciary, the plan administrator instead of the ERISA section 3(16) Plan Administrator, a trustee instead of an ERISA section 403(a) Trustee, and an investment manager instead of an ERISA section 3(38) Investment Manager.
I originally began my ERISA section numbers/capitalization naming convention because I wanted to make clear that in discussing ERISA, I was referring to a 3(38) Investment Manager rather than the ambiguous term “investment manager” so often used in the financial-services industry. I then used the same naming convention for the other kinds of ERISA fiduciaries.
In attempting to achieve greater precision, some readers, including a number of prominent ERISA attorneys, have pointed out gently (and other readers not so gently) that I may have succeeded only in confusing the issue further. For example, using the term “ERISA section 3(38) Investment Manager” could make some people think that a plan can have only one “investment manager” as defined in ERISA section 3(38).
That’s not true, of course: a plan can have more than one investment manager (just as it can have more than one trustee or more than one named fiduciary–ah, but only one plan administrator).
In reality, though, very few defined contribution plans have investment managers and, in those rare cases where they do, they have only one. (Many, perhaps most, defined benefit plans, in contrast, have at least one investment manager and often have more than one of them.) Nonetheless, it’s important to explain the law of ERISA as clearly as possible and separate that explanation from descriptions of customs and practices in the retirement plan arena in order that advisors may have available to them the best practicable information.
W. Scott Simon is an expert on the Uniform Prudent Investor Act, Restatement (Third) of Trusts and Title I of ERISA. He provides services as a consultant and expert witness on fiduciary investment issues in depositions, arbitrations and trials as well as in written opinions. Simon is the author of two books including The Prudent Investor Act: A Guide to Understanding. He is a member of the State Bar of California, a Certified Financial Planner® and an Accredited Investment Fiduciary Analyst™. The author’s views expressed in this article do not necessarily reflect the views of Morningstar.