Fiduciary, Compliance, and Client Advisory Issues
The five duties
ERISA 404(a)(1) imposes prudence, loyalty, diversification, adherence to plan documents, and reasonableness of expenses. Identify the named fiduciary, the plan administrator, and the trustee, and remember that fiduciary status can be functional - anyone exercising discretion or control over plan management or assets is a fiduciary, regardless of title.
Roles and disclosures
Be fluent in the difference between a 3(21) investment adviser (advises, but the sponsor retains decision-making and liability) and a 3(38) investment manager (a fiduciary who takes on discretion and liability for the assets assigned). A 3(16) administrator can assume certain administrative duties. Know the 408(b)(2) service provider disclosure of compensation and the 404a-5 participant fee disclosure. ERISA 404(c) shields fiduciaries from participant investment outcomes only if the required disclosures and control exist - it never excuses a failure to prudently select and monitor the menu.
Prohibited transactions
IRC 4975 and ERISA 406 prohibit party-in-interest dealings and fiduciary self-dealing. Common examples in questions: plan loans to a party in interest, use of plan assets for the employer's benefit, and paying unreasonable compensation to a service provider.
Traps
- Co-fiduciary liability for knowingly participating in or concealing another fiduciary's breach.
- ERISA bond versus fiduciary liability insurance.
- Assuming a recordkeeper's error excuses the sponsor's monitoring duty - it does not.
- Assuming all corrections require the IRS voluntary program; many self-correction options exist for eligible failures.
Rule of thumb
Advise a documented annual fiduciary review: confirm the plan document matches operations, benchmark fees and share classes, review the investment menu and performance, verify timely deposits and 5500 filings, and minute the decisions. Papering the process is what most often saves a client when a question asks whether the fiduciary acted prudently.