fiduciary_liability

Instilling a Fiduciary Culture

A fiduciary is someone who holds other people’s money
or has power over the deployment of that money to perform a professional service for the exclusive benefit of the entrusting party. 

ERISA Fiduciary Administrators LLC (‘EFA”) uses a four phase approach to help a plan sponsor select and organize the right team of fiduciaries.  At a minimum, candidates should be willing to serve without reservation, understand the implications of accepting fiduciary responsibility and have both the right skill set and the time available to perform the assigned responsibilities. Once the plan sponsor appoints the right fiduciaries, we then move on to optimize the fiduciary governance structure and establish appropriate fiduciary controls and procedures to insure that fiduciaries remain qualified to perform these roles and undergo periodic evaluation of their performance.

PHASE ONE:  IDENTIFYING THE CURRENT PLAN FIDUCIARIES

To instill a fiduciary culture, the plan must have qualified persons who knowingly and voluntarily agree to accept a specific delegation of discretionary control and authority over the plan.  At this stage of the process we create the plan’s fiduciary organization chart in order to identify the current fiduciaries.  These include the designated fiduciaries, i.e. those persons whom the plan’s governing instruments designate as a fiduciary or their delegate.  Next we identify any functional fiduciaries.  These are persons who have from time to time actually exercised discretionary control or authority over the administration of the plan or the investment of plan assets, but who are not designated fiduciaries or their delegate. Lastly, we identify any investment advice fiduciaries.  These are banks, insurance companies or Registered Investment Advisors who are rendering investment advice in exchange for a fee paid by the plan.   We use these data to assemble the current fiduciary organization chart and illustrate the flow of services by an between fiduciaries and the non-fiduciary vendors.

PHASE TWO:  RESOLVING MISALIGNMENTS IN THE FIDUCIARY ORGANIZATION CHART

At this stage, we confer with the plan sponsor to review the fiduciary organization chart and confirm that it makes sense.  We regularly find, for example, that plan documents designate the company’s board of directors as the plan’s official “Plan Administrator.”   In the absence of the board’s delegation of this responsibility, this presents two significant problems..  First, it causes each member of the board to be considered a designated fiduciary at this very granular level of day-to-day plan management.  This generally requires a level of attention to detail that is beyond the scope of a director’s role. Second, while a former group of directors would have previously approved the plan document that included this designation, subsequently appointed directors may not have that degree of institutional knowledge and feel that they did not consent to undertake fiduciary responsibility by accepting their appointment as a director.  They are, in effect, blind-sided by this revelation, which also means they have not obtained adequate fiduciary liability coverage.  In most cases, the plan sponsor does not want the board left in this position. EFA helps the plan sponsor fix these unintended misalignments of fiduciary responsibility to insure that the right persons are slotted into the fiduciary organization chart, their written consents have been obtained  and proper note has been taken of their need for adequate fiduciary liability insurance coverage. This phase requires a critical look at the available candidates, their qualifications, their relationships to the plan sponsor and among themselves, and their independence from the plan’s vendors.

PHASE THREE:  FIDUCIARY TRAINING

Periodic continuing education is essential to instilling the fiduciary culture.  We will interview and work with each of the plan fiduciaries to insure that they have an accurate and complete understanding of their functional responsibilities, how their responsibilities coordinate with those of other fiduciaries and the plan’s vendors and their exposure to fiduciary liability.   Corporate executives and other insiders who agree to accept a designation as a fiduciary, of course, are piling on those responsibilities to their already demanding position.  An insider must be clear on when they are acting in a fiduciary capacity and when they are acting in their role as a corporate executive.  The plan sponsor’s CFO, for example, might agree to act as a fiduciary for investment purposes. In that case, the CFO is acting as a fiduciary only when he or she exercises the discretionary control and authority regarding investment of plan assets.  As a corporate executive, the CFO, when performing the essential functions of his position as CFO, might participate in making decisions that indirectly affect the plan.   Fortunately, not everything the CFO does is treated as a fiduciary act, even if the CFO’s decisions impact the plan.  As long as those decisions are not the result of the CFO’s exercise of the discretionary control and authority that makes him or her a plan fiduciary, any such decision would not be a fiduciary act by the CFO.  This is the classic “hat switching” dilemma that most insiders face.  EFA will advise insiders to insure that they are comfortable with their timing in switching hats and what to do if this presents a conflict of interest with the duties of their executive position.

PHASE FOUR:  EVALUATING FIDUCIARY PERFORMANCE

At the end of each plan year, EFA provides a Fiduciary Report to the plan sponsor that discusses all fiduciary issues confronted and all fiduciary actions taken during that period. The report includes EFA’s assessment of the performance of all plan vendor’s performing administrative services, as well as self-assessment by each plan fiduciary.