About a year ago, I was asked by an advisor if we had ever written
anything about the potential pitfalls of hiring a relative as a plan
advisor.
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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