We hadn’t, as it turns out, in no small part because some things just seem (painfully) obvious to me – but it resulted in a column that, as I tried to point out at the time, was applicable to more than just familial relations.
In recent weeks I have received similar requests: one from an advisor looking for something on the hazards of “tying” bank business to providing services to a retirement plan, and another looking for validation of the wisdom of using a qualified 401(k) advisor on a plan rather than a part-timer.
Now, as someone who has been involved with ERISA and its fiduciary strictures his entire professional life, the responses to these questions are nearly self-evident. But let’s face it: Many, perhaps most, plan fiduciaries haven’t had that much exposure.
Before making a decision to hire an advisor – or for that matter, any decision involving the plan – here are some key considerations that plan fiduciaries should bear in mind.
If you’re a plan sponsor, you’re an ERISA fiduciary.
If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. Ditto if you are able to hire individuals to control or invest those assets.
If you’re an ERISA fiduciary, you have specific legal responsibilities.
There are several specific duties under the law, but the primary one is that the fiduciary must run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.
Note the words “solely” and “exclusive purpose.” Now consider a plan fiduciary who decides to hire a service provider based on services they provide outside the plan. Would that be a decision solely in the interests of participants? For the exclusive purpose of providing benefits?
ERISA fiduciaries must avoid conflicts of interest.
ERISA fiduciaries must also avoid conflicts of interest – meaning, according to the Labor Department, “they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.”
That means that a plan sponsor must not cause the plan/participants to pay for services if it results in free and/or discounted services for the employer/plan sponsor. Oh, and that’s even if the price the plan/participants pay is deemed reasonable.
As an ERISA fiduciary, you’re expected to be an expert — or to hire help that is.
It’s one thing to find yourself in a job for which you are not immediately trained, or perhaps even qualified, but there’s no beginner track for ERISA fiduciaries. You’re not only directed to act for the exclusive purpose of providing benefits, but to do so at the level of an expert. The DOL has said that “Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert.”
There’s nothing that says that a relative can’t meet that standard, nor should providing other, unrelated services to the organization preclude a firm from consideration for offering services to the plan. And, of course, there is nothing that says a part-time advisor couldn’t provide a full-time level of service and attention.
On the other hand, as an ERISA fiduciary you need to be sure that they do, in fact, meet that standard.
As an ERISA fiduciary, your liability is personal.
ERISA holds plan fiduciaries to a high legal standard. Indeed, at least one federal court has described it as “the highest known to the law.”
There are any number of things that can go wrong in running a workplace retirement plan. That’s why it’s important to hire experts – and to keep an eye on them. But don’t forget that you, as an ERISA fiduciary, can be held personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.
It is, of course, possible that a brother-in-law, a banking relationship, or an individual who is only committed on a part-time basis is, in fact, an expert in such matters, that they bring real value to your plan and the participants and beneficiaries it serves, and that the decision to engage those services is based solely on your desire to fulfill your fiduciary obligations – for the exclusive benefit of the plan, its participants and beneficiaries.
Just make sure that you have made that determination independent of other factors, and that, perhaps particularly if those other factors are present, that your process and analysis is documented.
Your advisor-to-be will understand.
- Nevin E. Adams, JD
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