LUTZ BUSINESS INSIGHTS
Strategies to Minimize Fiduciary Liability
PUBLISHED: MARCH 6, 2018
The modules below describe the various forms of liability fiduciaries are subject to, and actions that can help minimize that liability.
Fiduciary Liability Explained
In addition to criminal penalties, ERISA permits participants and beneficiaries to bring civil actions against a fiduciary who breaches duty.
The fiduciary is personally liable for any losses resulting from a breach.
- Any profits realized as a result of a breach must be restored to the plan
- Any losses suffered by the plan must be made whole
With the exception of the named fiduciary, a plan fiduciary’s personal liability to the plan is limited to the functions the fiduciary performs, or for which the fiduciary is responsible.
Any fiduciary who is aware of other fiduciaries’ actions that may violate legal standards must take all reasonable and legal steps to prevent such actions. If a fiduciary takes all of the reasonable and legal steps to prevent a fiduciary breach but does not succeed in preventing the breach, then such fiduciary should not incur liability for the other fiduciaries’ actions if reasonable efforts to remedy the breach are undertaken.
Individual Fiduciary Liability
Named fiduciary is not liable for designated fiduciary’s acts and omissions carrying out fiduciary responsibilities, however, a named fiduciary would be liable if the named fiduciary fails to monitor designated fiduciary’s activities.
Develop procedures for monitoring such individuals or entities based on the needs for each plan. Make procedures flexible enough to be modified in the event of any changes affecting the plan.
Draft Investment Policy Statement
Draft a written statement that provides the fiduciaries who are responsible for plan investments with set guidelines and general instructions about various types or categories of investment management decisions. An investment policy generally does not include directions about the purchase or sale of a specific investment. If hiring an outside consultant, condition such appointment on the implementation of an investment policy.
The plan sponsor may offer to indemnify employees who are fiduciaries with respect to fiduciary suits that may arise under ERISA. Examples of permitted indemnification agreements are:
- Indemnification of a plan fiduciary by:
- an employer, any of whose employees are covered by the plan, or an affiliate of such employer or
- an employee organization, any of whose members are covered by the plan; and
- Indemnification by a plan fiduciary of the fiduciary’s employees who actually perform the fiduciary services.
Hire Trustees and Investment Managers
Fiduciaries and trustees may look to hire outside professional trustees and investment managers to make plan decisions. Potential liability exposure may be limited through this course of action.
Fiduciaries and trustees must carefully monitor professional trustees and investment managers.
Hire Lawyers, Consultants and Administrators
Lawyers, consultants, and third-party administrators (TPAs) might assist their clients with the practical implications of the plan sponsor being a fiduciary by doing the following:
- Helping plan sponsor understand its responsibilities
- Assisting with hiring a professional trustee or investment manager
- Recommending the indemnification of certain fiduciaries
- Recommending the purchase of fiduciary liability insurance
Conduct Periodic Audits
Conduct periodic self-audits to ensure that the plan is being administered in accordance with the terms of the plan document, ERISA and the Internal Revenue Code. Be aware of the warning signs that indicate when a self-audit would be appropriate. Annual financial audits should not be viewed or relied upon as comprehensive compliance audits.
Department of Labor Penalties
The Department of Labor (DOL) may assess a civil penalty equal to 20 percent of the applicable recovery amount in the event of a breach.
The DOL may, at its discretion, waive or reduce a penalty if it determines that the following occurred:
- The fiduciary or individuals involved acted in good faith
- It is unreasonable to expect the fiduciary or individuals involved to restore all losses without experiencing severe financial hardship
Reduced penalties may apply if fiduciary files application with DOL under the Voluntary Fiduciary Compliance Program.
The DOL may assess a civil penalty equal to 20% of the applicable recovery amount in the event of a breach.
Breaches Before or After Being a Fiduciary
A fiduciary cannot be held liable for a breach of fiduciary duty committed before becoming a fiduciary or after being a fiduciary. Even though a fiduciary may not be liable for a breach, the fiduciary must take steps to remedy the situation if aware of the breach. Failure to do so might be considered a subsequent independent breach of fiduciary duty by the fiduciary
Terminating a Fiduciary
It is recommended that both the plan sponsor and the terminated fiduciary document the termination process, actions taken, and steps to ensure a smooth transition to the new fiduciary.
- Must follow plan procedures to terminate responsibilities
- Must make sure another is prepared to assume those responsibilities
Fiduciary Liability Insurance
An insurance policy covering plan sponsor’s directors, officials and fiduciaries must specifically cover ERISA claims. This is not the same as a fidelity bond. A fidelity bond protects the plan.
Fiduciary insurance protects fiduciaries and their personal assets from lawsuits alleging breaches of fiduciary responsibility. Review or purchase a policy that provides broad coverage.
Education and Documentation
Fiduciaries must follow written procedures that can demonstrate compliance with ERISA’s fiduciary standards. Plan fiduciaries also need to understand their responsibilities and obligations under ERISA.
- Create and implement a fiduciary training program
- Develop worksheets to document and monitor roles and responsibilities
Hire Investment Adviser
Fiduciaries may hire an investment adviser to provide recommendations related to investment options. Investment advisers are considered a co-fiduciary. Fiduciaries must routinely monitor investment advisers.
Establish Participant-Directed Accounts
In general, fiduciaries are not liable for any losses due to a participant’s investment choices if they are deemed to be compliant with ERISA Section 404(c) and regulations promulgated thereunder.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.
COPYRIGHT 2018 RPAG. ALL RIGHTS RESERVED.
120 VANTIS, SUITE 400 ALISO VIEJO, CA 92656 949.305.3859
CHRIS WAGNER, CHFC®, CFP®, CPFA® + INVESTMENT ADVISER
Chris Wagner is an Investment Adviser at Lutz Financial. With 15+ years of relevant experience, he specializes in providing company and corporate retirement plan consulting and investment advisory services. He lives in Elkhorn, NE, with his wife Kristin, and children Brynn and Owen.
AREAS OF FOCUS
- Retirement Plan Consulting
- Investment Product Analysis
- Provider and Fee Benchmarking
- Fiduciary Guidance
- Plan Design Analysis
- Investment Advisory Services
- Participant Education
AFFILIATIONS AND CREDENTIALS
- National Association of Plan Advisors, Member
- CERTIFIED FINANCIAL PLANNER®
- Certified Plan Fiduciary Advisor®
- Chartered Financial Consultant
- BSBA in Marketing, Midland University, Fremont, NE
- American College of Financial Services, Bryn Mawr, PA
- Knights of Columbus, Member
- St. Wenceslaus, Volunteer Coach
- Tax Credits Increase for Companies Establishing a Retirement Plan in 2020!
- Selecting and Monitoring Service Providers
- Strategies to Minimize Fiduciary Liability
- 3(21) and 3(38) Fiduciary Services
- Tips for Administering a Prudent Retirement Plan
- The 2017 To-Do List for 401(k) Plans
- October 1st Safe Harbor 401k Deadline
- How Are You Paying the Company's Retirement Plan Expenses?
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