A common law principle the concept of fiduciary duty applies to parties who deal with other parties’ money. ERISA set the standard in the following definition.
A fiduciary subject to ERISA’s fiduciary responsibility provisions is defined as a person who:
1. Exercises any discretionary authority or discretionary control respecting management of an employee benefit plan subject to ERISA or exercises any authority or control respecting management or disposition of its assets
2. Renders investment advice for a fee or other compensation, direct or indirect with respect to monies or property of a plan or has authority or responsibility to do so or
3. Has any discretionary authority or responsibility in the administration of a plan. [Section 3(21)(A)]
It is applied by states to non ERISA accounts via the UPIA and UMIFA.
Authority or responsibility in administration or authority or control over disposition of plan assets are keys to the interpretation of the law. Generally, to be a fiduciary there must be an element of authority either direct or implied. This becomes a question of fact for the court to determine. For example, it is unlikely that a person who is only a custodian of plan assets absent any control would be a fiduciary.
Trustees are vested with the responsibility for management of plan assets; they clearly are fiduciaries. A plan’s officers and directors, members of the investment committee, fiduciaries “named” in plan documents, persons delegated fiduciary duties by “named” fiduciaries, persons who select fiduciaries, fit the test. Someone who is authorized to perform these duties will be a fiduciary regardless of title. To the extent that plan consultants and advisors including accountants and attorneys influence or exercise discretionary authority or control over plan management or investment of plan assets they are fiduciaries.
Purely clerical or ministerial duties like recordkeeping, reporting, processing, or disseminating information generally will not be enough to render fiduciary liability on a person absent the authority, discretion or control.
The Plan Sponsor, corporate directors, officers, shareholders, and employees, however, are more likely to have the requisite control necessary to qualify as performing a fiduciary function. In addition, they may be likely to be a named fiduciary. So, the company maintaining the plan, since it likely has discretionary authority (at least in a single employer plan), and any officer or employee who exercises discretionary authority on behalf of that company, is a fiduciary.
Members of a company’s board of directors are fiduciaries to the extent that they perform fiduciary functions such as the selection and retention of other plan fiduciaries. The plan’s sponsor (the Company) and its board of directors will be fiduciaries in virtually all single employer plans. While the fiduciary responsibilities of the board members may appear to be limited to certain discreet matters, their status as fiduciaries may have broader implications with respect to co-fiduciary liability for prohibited transactions and breaches of the general duties.
While attorneys, accountants, actuaries, and consultants generally are not fiduciaries when performing their normal professional functions, once they advise on matters of plan policy or the advisability of certain investments they may be a fiduciary. The law is becoming increasingly broadly construed.
Investment advisors are fiduciaries if they provide advice as to the value of securities or property or the advisability of purchasing or selling such property. AND, the advisor must have discretionary authority or control to purchase or sell. If the advisor renders advice to the plan on a regular basis with the understanding that his advice will be an integral factor in the investment decision-making process relative to the particular needs of the plan, then he will be a fiduciary.
If the investment advisor is appointed to manage plan assets, trustees or named fiduciaries will not have co-fiduciary responsibility for acts or omissions of the advisor unless he knowingly participates in or tries to conceal those acts or omissions.
It is not only pension plans that are subject to fiduciary responsibilities, but welfare funds that provide medical, dental, accident, disability, death, unemployment or certain other specified benefits are all subject to the laws. Included are defined contribution, defined benefit plans, single employer, multiemployer, multiple employee, union collective bargaining plans and non-collective bargaining plans and, in state issues, other trusts, foundations, and endowments.
“THE UNKNOWING FIDUCIARY”
In his excellent article, “The Fiduciary Trap”, noted ERISA authority Matthew McArthur, Esq., recounts the case of a company bookkeeper merely doing his job who was found to be a fiduciary of the company retirement fund because he was responsible for disbursing its assets. Under some financial duress, the company principals instructed the bookkeeper to advance fund assets to the company in the form of a loan. The loan significantly drew down plan assets so that the bookkeeper was unable to collect his own plan benefit when he left the company. When he sued for his benefit, the courts not only denied his claim, but held him liable for the improper loan. He was required to pay in the amount of the difference between the value of his benefit and the loan.
In defining the fiduciary duties of trustees, a self-trusteed fund defined their role as follows: “Without any question the firm is a fiduciary and each member of the Board of Directors (who hold management authority over the firm and the plan) is also a fiduciary. Any other firm employee is a fiduciary if he exercises or possesses any discretionary authority or responsibility in the administration or management or disposition of plan assets.”
To summarize, fiduciaries include, among others:
- Trustees
- Investment advisors
- Stockbrokers
- CPAs
- Officers of the company
- Owners of the company
- Directors of the company
- Plan administrators
- Investment management consultants
A fundamental factor in determining whether someone is a fiduciary or not is the client’s reliance on what the party holds itself out to be.
Fiduciaries have to provide individualized investment advice pursuant to a mutual understanding (i.e. written contract with client) on a regular basis pertaining to valuations or recommendations as to investing for a fee.
While ERISA has a provision that fiduciaries are required to acknowledge their fiduciary status in writing, failure to do so does not mean you are not a fiduciary. Courts have been eager to apply the “Duck” theory (although not actually by that name). If it looks like a duck, walks like a duck, smells like a duck, and acts like a duck, it’s a duck. A fiduciary status will be defined by the actions of the party in question. Often, if the client relies on a party as fiduciary, it will be found to be one. In Blatt v. Marshall and Lasserman, in finding an accounting firm to be a fiduciary because it controlled whether or not contributions were returned to plan participants, the court said that “ERISA fiduciary status is determined by focusing on the function performed by the individual rather than on the individual’s title.”
WHAT THE COURTS SAY
Courts and regulators have been becoming consistently more liberal in their application of the question, “Who is a fiduciary?” Some things they have said include the following:
Employee benefit fund trustee has “exclusive authority and discretion to manage and control assets of plan” and loyalty is to beneficiaries, not to party who appointed him.
Pension plan trustees are fiduciaries but not a bank acting only as depository for funds is not a discretionary.
Attorneys who are fiduciaries knowingly participated in breaches committed by fund fiduciaries are also fiduciaries.
Non-fiduciaries who aid fiduciaries in breach of duty are liable.
Individual not a trustee but who represented himself as having such authority and control will be construed as a fiduciary.
Insurance company may be fiduciary because of its power to amend a group life insurance contract, altering its value.
An arrangement to pay pension benefits to one former employee creates an employee pension benefit subject to ERISA. James Williams worked 34 years for the Wright Pest Control Co. of South Carolina, Inc. Williams received a letter from WPCC’s president, which described in detail a “plan, which will provide for an uninterrupted continuation of cash as you gradually alter your work schedule to a retirement status.” The letter promised Williams, among other benefits, a monthly check in the amount of $500 and noted that “These benefits will continue until your death or when you have no use for them.” The difficult question for the 11th Circuit was whether the payment of a $500 monthly retirement check to Williams created a “pension plan” within the meaning of section 3(2) of ERISA. The court held that an ERISA plan existed, due to the four factors necessary: (1) “intended benefits,” (2) “beneficiaries,” (3) the “source of financing” for the benefits, and (4) “procedures for receiving benefits.”
ERISA permits the named plan fiduciary the option of delegating the responsibility of investing plan assets to a professional investment adviser who then might assume the ERISA fiduciary obligations to the plan, including the duties of care and loyalty.
ERISA fiduciary status is determined by focusing on the function performed by the individual rather than on the individual’s title; an accounting firm was a fiduciary to the extent that it controlled whether or not contributions were returned to plan participants.
ERISA Section 3(21)(A) limits the scope of both fiduciary status and responsibility; a person is a fiduciary with respect to only those aspects of the plan over which he or she exercises control or authority, and his or her fiduciary duty extends solely to those functions. Jury instructions should delineate the requisite control necessary to consider a person a fiduciary and warn jurors against drawing inferences of control or authority merely from a person’s status, including status as a former employer, an officer, a principal shareholder or a director.
An employer is a fiduciary with respect to a plan only when and to the extent that it engages in activities governed by ERISA, including acting in the capacity of plan administrator.
A stockbroker becomes a fiduciary when, without authorization, he invests the assets of an employee benefit plan in unsuitable, highly speculative securities and disregards the trustee’s instructions to liquidate.
WHAT THE DEPARTMENT OF LABOR SAYS
The DOL defines the following as plans subject to fiduciary responsibility.
An HR 10 plan if it covers both self employed and their employees.
Collectively bargained vacation fund.
Prepaid legal service.
Group health, life and disability insurance plans.
Apprenticeship and training plans.
A collectively bargained vacation benefit account.
A severance pay plan.
Contributory hospitalization plan.
Insured benefit program providing accident, medical and life coverage for less than 10 employees.
Severance pay funds, under which certain employees would receive one week’s pay for every year of service.
A non-contributory hospital benefit program for 4 employees.
Employee bonus program where cash is deposited into employee’s IRA.
An employer’s life insurance program under which the employer and participating employees split the premium costs.
Group term life insurance and time loss benefits for disabilities.
Financial assistance to artist guild sick and relief fund.
A relief fund that provides financial aid and other benefits to alleviate the financial hardship of a labor union’s members in the event of sickness or death.
A hospital’s prepaid legal services plan which provides for both employer and employee contributions.
Apprenticeship and training benefits.
A union death benefit fund.
Guaranteed annual income fund.
Death, disability and medical benefits for employees travelling on company business.
Group insurance trust.
Bond purchase plan.
Dental benefits.
Disability benefits.
Collectively bargained severance program.
Monthly benefits to employees retired on pensions with certain age and service requirements met.
Union “remembrance fund” which provides burial expenses of $ 1,500 to union members.
Prepaid dental benefits.
Association’s contributory savings and security plan.
Trust which makes monetary grants to industry apprenticeship and training programs established by employers and employee organizations.
Bonus plan to key employees.
An in-house confidential session with a psychological counselor who provides professional assistance.
Welfare benefit plan for life and health insurance.
Supplemental benefits to workers who meet certain requirements.
Plan providing lump sum death and retirement benefits to current and retired fire department members.
A production participation plan assigning royalty points to employees and making annual payments from property.
Association formed to provide medical and medicinal services to its members.
Medical, surgical, hospital care, sickness, accident, disability and death benefits for association members and union local.
The facts of who and what is subject to fiduciary responsibilities can be answered by the Department of Labor. If there are an employer and employees or employee organization and there is jurisdiction under the commerce clause under normal business activities, and benefits are provided to participants and/or their beneficiaries, the fiduciary responsibilities apply from Dr. Smith’s four person Keogh to IBM’s pension fund.