I Didn’t Know I Was a Fiduciary!

Most business owners are fiduciaries to their plan …and they don’t even know it.   So what is a Fiduciary? 

A fiduciary is any person who has discretionary authority over the plan assets and who exercises any control over the plan assets; or, who gives investment advice to the plan for compensation.  When it comes to your company, as the business owner and the sponsor of the plan, you are going to fall into the purview of “trustee” or in other words “fiduciary”.  If there is a plan committee or a board of directors, then they are also acting as “fiduciaries”. 

What is even more important to understand as a fiduciary, you can be held personally liable (that means your own personal wealth) for any breach of fiduciary standards.  In other words, if something goes wrong….that is if prudent standards aren’t instituted and followed in the plan, then you as the plan sponsor can be held personally liable for losses in the plan.

So what is the standard that a company or individual must follow or meet as a Fiduciary?

The Regulator

Pension plans and trustees are regulated by ERISA(Employment Retirement Income Security Act, a Federal Law) and enforced by the DOL (Department of Labor).  ERISA was created to protect plan participants and their beneficiaries and establishes guidelines and standards for pension and 401(k) plans.  ERISA requires a plan to provide participants with specific information about the plan and who is responsible as fiduciaries for overseeing and managing the plan.  DOL audits retirement plans and has the power to penalize non-compliant plans. 

There is also an investment standard that a fiduciary must follow.  This standard is called the “prudent investor rule”.  The most authoritative prudent investment rule is that of the American Law Institute restatement of the law of trusts 1992. Before the prudent investor rule, the fiduciary standard used was the “prudent man rule”

The Standard

Prudent Man…or Prudent Investor?

Under the Prudent Man Rule as long as you exercised prudence as an ordinary person….someone of just average intelligence, you could pass the standard of investment prudence.  But the prudent man rule was a legal standard that was established in 1830 by the Harvard College vs. Amory case…..years ago.  The new standard, the prudent investment rule is a legal doctrine that provides legal guidance to investment managers for overseeing and managing investment portfolios in a legal and satisfactory manner.  Even though the Prudent Investor Rule can tie its history to the original doctrine…. the Prudent Man Rule, today the standard is no longer satisfied with the ability of just an average person. Now it is held to an expert standard.  Therefore you are held to the "Prudent Investor Rule" as a trustee and as an expert in industry….someone who understands the methodologies of investing and how to apply them prudently.   This is much higher standard than the old Purdent Man Rule, and unless you hire/outsource this to someone else…who is willing to take the responsibility, you are holding yourself out to be an expert; and may have to prove that you were expert in your decision making as a plan sponsor.

I outsourced it …..so I don’t have to worry about it.

 Many times plan trustees do outsource this; but, unknowingly work with people or companies that are not qualified.  Sadly, many profess a level of expertise in the field of investing, but are not licensed or because of inherit conflicts of interests cannot, when it comes to nuts and bolts, take on co-fiduciary duties.