Handling distribution checks - bonding or fiduciary issues?

[Guest crosseyetester]

I have posted this elsewhere but have not been able to get a response...

Is there any issue with bonding or fiduciary liability for the following procedure:

Whenever a participant retires and begins monthly payments from a certain db pension plan, the first check is sent from the bank to a retirement (non-actuary) consultant, who then sends that check directly to the participant, with a letter indicating that all future checks will come directly from the bank.

Should that consultant be bonded?

[J Simmons]

I don't think that the retirement (non-actuary) consultant either is a fiduciary or needs bonding just by reason of or for the role you describe. The bank is the issuer of the check, not the consultant. The assets are at the bank; the check is a mere draft against them that has not yet been presented. The consultant could only obtain the assets through forging the check, presenting it and the bank acting on the forgery. Possession of a check made payable to the retiree does not, in my opinion, give the consultant sufficient discretion or possession to render him a fiduciary. If not a fiduciary, no need to be bonded.

That being said, Crosseyetester, why does the bank route the first benefits check through the consultant?

[Guest crosseyetester]

J Simmons,

Thank you very much for responding to my almost forgotten question. We don't know why she does many of the things she does, but if you say there really is no liability issue here then I feel better.

[Kirk Maldonado]

As to whether a non-fiduciary must be bonded, ERISA section 412(a) provides as follows:

Every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan (hereafter in this section referred to as “plan official”) shall be bonded * * *.

In this case, the consultant receives a check containing plan assets. Accordingly, the consultant is required to be bonded because the consultant "handles" plan funds, even though the consultant is not a fiduciary. For additional detail regarding this specific requirement, see DOL regulation section 2580.412-6.

As to whether the bond has to provide protection against forgery, ERISA section 412(a)(3) provides as follows:

Such bond shall provide protection to the plan against loss by reason of acts of fraud or dishonesty on the part of the plan official, directly or through connivance with others.

Thus, the bond must protect the plan against losses caused by forgery. For additional detail regarding this specific requirement, see DOL regulation section 2580.412-9.

[J Simmons]

"Handling" plan funds?

DoL Reg §2580.412-6(a)(2) provides in relevant part: "... a given duty or relationship to funds or other property shall not be considered 'handling,' and bonding is not required, where it occurs under conditions and circumstances in which the risk that a loss will occur through fraud or dishonesty is negligible. This may be the case where the risk of mishandling is precluded by the nature of the funds or other property (e.g., checks, securities or title papers which can not be negotiated by the persons performing duties with respect to them). It may also be the case where significant risk of mishandling in the performance of duties of an essentially clerical character is precluded by fiscal controls."

DoL Reg §2580.412-6(a)(2) also provides: "Physical contact with cash, checks or similar property generally constitutes 'handling.' However, persons who from time to time perform counting, packaging, tabulating, messenger or similar duties of an essentially clerical character involving physical contact with funds or other property would not be 'handling' when they perform these duties under conditions and circumstances where risk of loss is negligible because of factors such as close supervision and control or the nature of the property."

The OP described the consultant's involvement as: "the first check is sent from the bank to a retirement (non-actuary) consultant, who then sends that check directly to the participant, with a letter indicating that all future checks will come directly from the bank." To me, this seems to fall in the category of 'messenger or similar duties of an essentially clerical character', and not 'handling'.