Hello, Co-Fiduciary: Duties and Liabilities of the Rep Whose Accounts Include Retirement Plans
ongratulations, you have marketed "upstream" to capture the assets of a company retirement plan! You will meet with company officials, determine the needs of the plan and select outside money managers. Sounds easy, right? Not so fast. ERISA applies and you will be well-advised to learn what your new duties and liabilities are under that far-reaching federal statute.
Let's begin by defining who is a "fiduciary" to a plan under ERISA. An ERISA fiduciary is anyone who "exercises any authority or control respecting management or disposition of assets." Courts interpret this provision broadly. Thus, even though one has not been deemed officially to be a fiduciary, words or conduct may cause one to be considered a fiduciary for ERISA purposes. Likewise, a plan trustee may be deemed to be a fiduciary even though that person does not have discretionary authority to manage the assets of the plan. And perhaps most relevant to reps (and their firms), those who have the power to appoint and remove fiduciaries are ERISA fiduciaries themselves.
According to Section 1104(a)(1) of ERISA, an ERISA fiduciary, such as a rep, must perform his or her duties "with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man" would employ. ERISA fiduciaries must do so "by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly not prudent to do so."
Reps also should pay close attention to what the term "diversification" may mean in the context of a retirement plan. One Department of Labor (DOL) regulation requires that fiduciaries consider the following factors as part of their investment duties:
The composition of the portfolio with regard to diversification;
The liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan; and
The projected return of the portfolio relative to the funding objectives of the plan.
Accordingly, reps need to contemplate how they will investigate, and continually monitor, a plan's funding objectives as well as its anticipated cash flow requirements.
Perhaps some reps assume that delegation of their duties is the cure. It may not be. Reps who appoint a fiduciary must monitor that fiduciary to ensure that he or she is performing the duties with "appropriate prudence and reasonableness", according to one court. The DOL has offered guidance in regard to sufficient monitoring. Explaining the ongoing responsibilities of a fiduciary who has appointed trustees or other fiduciaries, the DOL stated: "At reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably be expected to ensure that the performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan." In connection with this duty, one court has held that the fiduciary must be prepared to reassume a delegated fiduciary duty when it becomes apparent to the fiduciary that the responsible party has breached its obligation.
Importantly, the DOL has made it clear that "any fiduciary may become liable for the breaches of fiduciary responsibility committed by another fiduciary of the same plan under circumstances giving rise to co-fiduciary liability." There are three such circumstances, and reps need to understand each:
If the rep participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach;
If, by the rep's failure to comply with his or her obligations under Section 1104(a)(1) (discussed above), he or she has enabled such other fiduciary to commit a breach; or
If the rep has knowledge of a breach by such other fiduciary, unless he or she makes reasonable efforts under the circumstances to remedy the breach.
So, for example, a rep who fails to monitor an outside money manager, who is committing a breach, has failed in his or her duty and thus is liable for that co-fiduciary's breach. Likewise, a rep who knew (or should have known, according to some courts), of another fiduciary's breach, but did not reasonably attempt to remedy that breach, is liable for that co-fiduciary's breach. Under ERISA, fiduciaries are not permitted avoid liability "by simply doing nothing", according to one court.
So, reps who work with retirement plans should celebrate. Then, they should get to work to avoid liability, not only for their own actions and inactions, but also for those of their co-fiduciaries!
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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.
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