The Fiduciary Blog

Lessons from Litigation: Plan Sponsors in the Courtroom

By Ron Hagan, CEO

Today's post, and the next few that follow, focus on the results of legal action against retirement plan sponsors and their key managers.  The sizes of the sponsors involved range from small privately held companies to large publicly traded companies.  Roland|Criss is serving as an advisor to legal defense teams on investment and administrative fiduciary standards of care.  Knowing this, plan sponsors ask me frequently what they can do to avoid the suffering that many fiduciaries are enduring.  I tell them that much of the pain is unnecessary, but happening just the same, due to ignorance of how to manage their fiduciary duty the right way.

Clues about the threats to mid-managers’ and senior executives’ personal assets are starting to emerge from cases working their way through the courts and the Department of Labor.  An often repeated outcome in the growing number of breach of fiduciary duty cases is defendants’ shock at learning how much they do not know about their legal duty.  This combined with a lack of proof of past conformity to fiduciary standards of care spells big trouble.

The Troubling Culture

Fiduciary risk has emerged as a hot topic in business circles.  Quick to seize on the fear it evokes, many investment consultants have learned that they can sell more business if they say that they takeover fiduciary liability.  This method of selling is growing even though federal law prohibits such a thing.  It is creating a troubling culture in which you should not get caught.

Anyone who serves in a fiduciary role is on the road to trouble when they buy into the idea that they can hire someone to handle their duty for them.  The defense cases in which we are participating reveal that a high percentage of executives trusted the false notion that their investment consultant or record keeper assumed all fiduciary liability.  On a broader scale, this indicates that ignorance among fiduciaries, combined with willful deception by some vendors, will likely lead many more executives into a courtroom.

A Look into the Abyss

If after checking with your investment advisor, pension consultant, and/or record keeper you believe that it, or they, have your fiduciary duty covered…call for help-immediately!

I have looked into the litigation and DOL enforcement abyss.  It is populated with business managers and executives who also thought that their vendors were “the fiduciary.”  Abdicating your role for even the briefest period will put you on a slippery slope that plaintiff lawyers and federal regulators will eagerly exploit.

Getting on a Safe Pathway

The most threatening condition for plan sponsors seen in current lawsuits and DOL action is the lack of an ERISA qualified fiduciary management system.  That is because investment vendors and record keepers, on whom most executives depend for advice, have a serious conflict of interest with plan sponsors.  As a result, they are unable to offer plan sponsors an independent and unbiased management system.  Vendors know this but most sponsors do not.

What should you do?  Get quality fiduciary training from an unbiased professional advisor.  It should not sell investment products but it should be highly skilled with investment analysis.  The experts it assigns to your account should have earned the AIFA^® designation.  The firm should be experienced with investment fiduciary audits and litigation defense.  This is no time to work with a novice.

Roland|Criss offers fiduciary training.  We also provide an added level of protection with our investment governance review.  It produces the ISP Rating^™ (“Investment Steward Practices Rating^™”).  This is a quick way to know how your practices align with the standard against which lawsuits are now being decided.  Call us for more information at (800) 440-3457 and learn how you can know your ISP Rating^™.

Here are some excellent resources that can help you:

Fiduciary Duty: The Six Most Critical Mistakes to Avoid (Roland|Criss Fiduciary Services)
Prudent Practices for Investment Stewards (Fiduciary 360, AICPA, Reish Luftman Reicher & Cohen)

Plan Sponsors are Following a Dangerous Course

By Lynne McAuley, West Region Director

I’ve noticed that vendors who sell products to retirement plans are using the word “fiduciary” a lot lately. Some vendors that publicly acknowledge their fiduciary duty properly educate their clients that a plan sponsor’s liability is much greater than a vendor’s.  A second group of vendors state falsely to their prospects and clients that they act as fiduciaries in place of plan sponsors. A third group of vendors proclaim loudly that they are not fiduciaries at all! How do plan sponsors make sense of this and what does it mean to them?

The Employment Retirement Income Security Act of 1974 (“ERISA”) defines a fiduciary to the extent that a person does any of the following:

1. Exercises any discretionary authority or control over the management of a plan, or management or disposition of plan assets;
2. Renders investment advice for a fee or other compensation, direct or indirect, over the disposition of plan assets, or has any authority or responsibility to do so; and
3. Has any discretionary authority or discretionary responsibility in the administration of such plan.

It should be obvious from the above definition, more than one person or entity can be a fiduciary at any one time. Normally, plans have several different fiduciaries. These include both insiders, such as company officers and plan committee members, as well as outsiders such as registered investment professionals. Where it is unclear if a person is a fiduciary, the courts apply a functional test under ERISA.  Persons in certain positions, however, such as the company employee who serves as the named fiduciary, trustee and plan administrator, are automatically considered fiduciaries.  Their liability may be shared by others but it cannot be off-loaded!

Frequently, corporate employers are confused about their fiduciary responsibilities. Some believe that once they hire investment advisors and investment managers, they no longer have further fiduciary responsibilities. This is simply not true!  The buck always stops with a plan sponsor’s key managers.

Another fallacy is the widespread belief that fiduciary duty focuses just on investment matters. Fiduciary duty under ERISA also involves many governance matters, claims administration, communicating with participants, as well as preparing required notices and disclosure to participants.

We hear from executives all over the country who are stunned to find that they are held legally liable to a set of fiduciary practices.  By increasing numbers, they are outraged that no one has made them aware of how to fulfill these practices.  They are learning that service providers are not on the hook for a plan sponsor’s fiduciary liability.  As a result, many of your peers want clarity from a truly independent source and are calling for unbiased fiduciary training and tools to satisfy their duties.

Quoted below are the actual claims made in recently filed lawsuits against executives like you:

• Participants incurred unreasonable fees and expenses.
• Fiduciaries caused the retirement plan to enter into agreements with third parties that charged excessive fees.
• Fiduciaries failed to inform themselves, understand, and monitor the various methods by which providers received payment and other revenue sharing arrangements.
• Fiduciaries failed to establish, implement, and follow plan oversight procedures.
• Fiduciaries failed to oversee the performance of co-fiduciaries.
• Fiduciaries were not entitled to the safe harbor protections of ERISA section 404(c).

For more clarity on your fiduciary duties and how to determine your exposure to liability, you may request a complimentary white paper entitled “Improve Your Pension Governance – Learn Where You Stand”.  Through the use of actual plan sponsor cases, the white paper demonstrates how Roland|Criss’ fiduciary governance system increases fiduciary protection on a before-and-after basis.  Click here to request a copy of the white paper.