Co-Fiduciary or Fiduciary Role - is There a Writing Requirement?

[Guest davsun]

It seems that in the 401(k) market, the terms "co-fiduciary" and "fiduciary" are thrown around quite frequently. Whether it is a broker/dealer or another entiity purporting to assume a co-fiduciary or fiduciary role for a plan sponsor, it seems to be a growing trend. The most common co-fiduciary "plan" is the one where an insurance company agrees to indemnify a plan sponsor for damages that occur from a breach of fiduciary duties based on the investment options provided. However, it appears that there are many caveats by which this can blow up in the face of an unsuspecting plan sponsor (e.g. only applies to a select number of proprietary funds as well as other exceptions). Does the term "co-fiduciary" even mean anything in the 401(k) market when an agent or representative uses the term? Does it have to be in writing? Or can ERISA § 3(21)(A)-(B) (29 U.S.C. § 1002(21)(A)-(B)) be interpreted to include a broker/dealer or entity to have assumed a fiduciary or co-fiduciary role by their actions alone as long as the actions fall within the parameters established under subsection (A) and are not precluded by subsection (B)?

As far as I can see, it seems like for an entitity to assume a fiduciary or co-fiduciary role, that it must be in writing per ERISA § 3(38)© (29 U.S.C. § 1002(38)©). Section (38)(B) also lists Registered Investment Advisers, Banks, and Insurance Companies as the entities capable of becoming an "Investment Manager." I would think that plan sponsors should be wary of hearing an agent or representative using either the "fiduciary" or "co-fiduciary" term and promptly ask whether this claim is in writing and what exactly the entity is suggesting it is assuming that responsibility for. Since ERISA 405 (29 U.S.C. § 1105) details the liability for breach of fiduciary duties by a co-fiduciary and that personal liability may ensue via ERISA § 409(a) (29 U.S.C. § 1109(a)), I would think it would be prudent for a plan sponsor to make such inquiries.

So am I on track with my thought process on the concepts outlined above? Does any "co-fiduciary" claim need to be in writing and absent such writing, it would amount to just puffery? Anyhow, these "terms of art" seem to be frequently mentioned, but are not often fulfilled within the 401(k) market and I was hoping to get some feedback on the topic. Thanks!

[QDROphile]

Although being a named fiduciary seals some fiduciary responsibility, under ERISA, fiduciary is as fiduciary does. If someone undertakes fiduciary functions, consciously or unconsciously, they are a fiduciary. Writings are important to define the scope of the fiduciary functions. Without some defined scope, any fiduciary of the plan is potentially responsible for all fiduciary matters relating to a plan.

I don't understand what you mean by a "claim."

[Guest davsun]

Thanks for the reply QDROphile! By "claim" I meant when an agent or representative of a business entity (e.g. broker/dealer, insurance company, etc.) claims that they offer "co-fiduciary" or "fiduciary" services and if they do not put this "claim" in writing, does it mean anything? Yes, the interpretation of ERISA fiduciary rules has opted for a "fiduciary is as fiduciary does" motto, as you so put it; however, it appears that many plan sponsors are often fooled into believing their providers have assumed a fiduciary or co-fiduciary role when in fact, they have not. The selection and monitoring of funds duty (along with the many other fiduciary responsibilities) remain the responsibility of the plan sponsor (or administrator / named fiduciaries by which the responsibility has been assigned). Obviously, under ERISA co-fiduciary rules (ERISA § 405), fiduciaries can be liable for the breaches of other fiduciaries under certain circumstances. My issue is with the so-called "investment professionals" selling 401(k) products and making co-fiduciary or fiduciary claims that they do not deliver in writing. I suppose the onus ultimately falls with each plan sponsor to be prudent and sift through what is real and mere puffery. If a breach and subsequent lawsuit occurs, they will just be at the mercy of the courts to determine whether an entity was truly a fiduciary or co-fiduciary based on their actions and whether personal liability may ensue.

[Peter Gulia]

davsun, here's a way to think about the situation you describe concerning a plan fiduciary who might hear a label or slogan to say more than it truly means.

A fiduciary that performs to ERISA's standard of care would not responsibly approve the portion of a service provider's compensation that's attributable to the value of the provider's assumption of a fiduciary responsibility unless the approving fiduciary is confident that it has a good writing that would enable the plan to prove the scope of the provider's responsibility. Likewise, an approving fiduciary would attribute (and evaluate) differential compensation for a provider's assumption of risk (rather than the sheer work to be performed) based only on the responsibility truly undertaken. Assuming otherwise equally-qualified service providers, a fiduciary shouldn't pay the one that calls itself a co-fiduciary much more than the one that doesn't unless the approving fiduciary prudently believes that the plan will have practical means at least to assert the plan's rights to get a recovery on the fiduciary's breach. Without that, why pay more for a supposed fiduciary responsibility that's unlikely to provide value that the plan could realize?

[Mike Preston]

Sometimes it doesn't revolve around additional compensation. Instead, it is merely a method of gaining client/plan sponsor confidence. I wonder if this issue is dealt with by the proposed regs from the DOL on fee disclosures? I read them once, but that was a while ago and, as we all know, they aren't final (nor likely to become final in the waning days of this administration).

I'm not sure that a fiduciary could wriggle out of responsiblity by claiming that no plan sponsor in their right mind would have approved their compensation without a writing. That seems to be something which directly opposes the "is as does" proverb.

[Guest davsun]

I've been wondering about DOL's proposed rule regarding 408(b)(2) as well. Didn't DOL/EBSA submit the final regulation back in September '08 to OMB (RIN: 1210-AB08) for approval? Regardless, whenever the final regulation is approved, it will be awhile before it is put into effect due to the need for granting sufficient time for all entities affected to comply. You are right Mike - perhaps this is where the issue I raised will be covered requiring the disclosure of any services done in a fiduciary capacity. I brought the issue up because after discussing fiduciary and co-fiduciary issues with several business owners, after closer inspection, the fiduciary services they were actually receiving were either far less than what was implied or non-existent. It seems that in these cases, these "terms of art" were thrown around to gain the confidence of a prospective client and once that was solidified, the rest was an easy sell.