Fiduciary? (hardship approvals)

[austin3515]

OK, let's say we're the TPA. Participant sends us a letter of impending foreclosure. Let's say we prepare the paperwork for the client to execute, and the client signs off on it and we don't send them support for the hardship.

My opinion is that this would NOT make a fiduciary because the plan includes objective criteria and there is generally no judgment involved (for example, you either have medical expenses or you don't). I can think of a handful of situations where judgment would be involved.

Others in the office take the opposite opinion and say "approving it is a fiduciary function." I say approving it would be "performing purely minesterial" activities related to plan administration.

Assume the Plans use the safe harbor standards.

What do YOU think?

[Guest Sieve]

I'd say you are a fiduciary with respect to approving hardships if YOU make the determination that there actually is a hardship, since the Administrator is not involved (as you describe it). You, therefore, exercise control over disposition of assets (at least to the extent of the hardship request)--you are not making a distribution based on the direction of the Administrator. The criteria may appear to be straight forward, but rarely are--& you'd take the hit if you did not perform the necessary due diligence before approving the hardship on the participant's say-so.

[QDROphile]

Someone is making a judgment about whether or not the distribution is necessary to prevent foreclosure. The process between a missed payment and foreclosure, and the time when it is reasonable to conclude that foreclousre will not be avoided another way, is complicated and lengthy. Someone also has to decide what amount is necessary to avoid foreclosure. Look at all the questions on the board about such details. The answers are not always easy or mechanical, despite the so-called safe harbor criteria. If decisions are made case-by-case, some fiduciary action is implicated. If you have such detailed guidance that you don't have to make any judgment calls, please share it with us. Many would be delighted to have the resource.

[austin3515]

OK, set's let's say a fiduciary it does make. You would agree that it would not extend to making the TPA responsible for say, poor investment decisions made by the trustee? So the exposure would be very limited, particularly if the hardship was clearly demonstrated.

[QDROphile]

A fiduciary with limited responsibility should make sure that the specification of the limited duties is clear and in writing. Except for some of the extreme parts of the co-fiduciary rules, the limits on the duties should also provide limits on the liabilities to the same extent. If the limited cofiduciary knows of a material breach of fidciary duty by another fiduciary, the limited fiduciary has a duty to take appropriate action. It is unlikely that bad investment judgment or execution by the other fiduciary would impose a duty on the limited fiduciary to act, but it depends on the circumstances.

[Guest Sieve]

But, yes, an individual is only a fiduciary to the extent that he/she has direct fiduciary responsibilities.

[Bill Presson]

OK, so we're the TPA. Participant sends us a letter of impending foreclosure. Let's say we prepare the paperwork for the client to execute, and the client signs off on it and we don't send them support for the hardship.

My opinion is that this would NOT make a fiduciary because the plan includes objective criteria and there is generally no judgment involved (for example, you either have medical expenses or you don't). I can think of a handful of situations where judgment would be involved.

Others in the office take the opposite opinion and say "approving it is a fiduciary function." I say approving it would be "performing purely minesterial" activities related to plan administration.

Assume the Plans use the safe harbor standards.

What do YOU think?

I agree with you. We essentially complete a checklist of the items required. We then notify the employer/Plan Administrator that the hardship requestor has provided the items on the checklist. They then approve and sign off.

[austin3515]

Geeze thanks, I was starting to think I was crazy... Guess it's grayer than I once thought, but I still don't see where the discretion comes in.

[Guest Sieve]

austin --

Let's assume, under your scenario, that you do not actually have appropriate documents, but nevertheless the employer signs off on the hardship request that you forward. Are you a fiduciary with respect to the granting of that hardship distribution?

[GMK]

I agree with you. We essentially complete a checklist of the items required. We then notify the employer/Plan Administrator that the hardship requestor has provided the items on the checklist. They then approve and sign off.

Assuming the Plan Administrator has approved the checklist, the TPA is probably OK.

The PA, however, might like to request copies of the documents before signing off and if needed for future reference. From other discussion on these boards, the PA, not the TPA, has the responsibility to be able to produce those documents if a question later arises, unless the written agreement between the PA and TPA specifically gives the TPA that responsibility. Just a reminder to PA's.

[austin3515]

Let's assume, under your scenario, that you do not actually have appropriate documents, but nevertheless the employer signs off on the hardship request that you forward.

I'm not sure that's relevant. I mean everyone makes mistakes... Sure if we screwed anything up we'd be responsible. That's just part of the deal...

I definitely agree that at a minimum it makes sense to forward to the plan administrator a copy of the related support so tha tif nothing else, they can sign off in good faith.

But of course, HR managers across the county are signing off on these things, and I have a sneaking suspicion they are not going to be held as fiduciaries if they do the same things that we have described here (i.e., get copies of invoices and approve for this).

[Guest Sieve]

If you screw up and you're responsible, as you admit could happen, then you're probably a fiduciary to the extent of the screw-up. After all, you were, as a result of (and to the extent of) the screw-up, in control of the disposition of those assets, which makes you a fiduciary in that limited role. (And, why is my hypo not relevant? If you always do things right, then what fiduciary responsibility/liability would you ever have to worry about?)

Just because the employer puts a pro-forma stamp of approval on your actions does not necessarily remove that limited fiduciary responsibility from your shoulders.

At least, I firmly believe that a conservative approach would be to act with that potential outcome in mind.

[PLAN MAN]

My opinion is that this would NOT make a fiduciary because the plan includes objective criteria and there is generally no judgment involved (for example, you either have medical expenses or you don't). I can think of a handful of situations where judgment would be involved.

I think your misunderstanding comes from your assumption right here. Are you saying that most hardships approve themselves and only a handful require a judgement to be made? I think whenever plan assets leave the plan there is a fiduciary responsibility to make sure the terms of the plan were followed.

Who is a fiduciary and to what extent is determined by both the written service agreement and the actions taken. While your service agreement may place fiduciary responsibility with the client (by their sign off), the client may say they just followed your instructions and made no determination. What would the DOL or IRS think?

[austin3515]

Following the terms of the plan is not a fiduciary function. A fiduciary is one HAS DISCRETION over plan assets. There is no discretion involved. For example, if someone is being evicted from their principal residence, the plan administrator has no option but to approve the distribution. If someone terminates employment and the HR rep signs off on the John Hancock form, there's no way that makes them a fiduciary. A hardship is only one level of "gray" above a termination distribution.

Same thing with loans. Someone applies for a loan, if the HR rep signs off on the loan again, no way that makes them a fiduciary (in my opinion) because again no discretion is involved to the extent it is allowed. Now, whoever sets the interest rate is a fiduciay, but simply signing off on a loan does not create fiduciary status (my opinion again).

In my humble opinion, not every single person involved in plan administration is a fiduciary.

[K2retire]

Following the terms of the plan is not a fiduciary function. A fiduciary is one HAS DISCRETION over plan assets. There is no discretion involved. For example, if someone is being evicted from their principal residence, the plan administrator has no option but to approve the distribution. If someone terminates employment and the HR rep signs off on the John Hancock form, there's no way that makes them a fiduciary. A hardship is only one level of "gray" above a termination distribution.

Same thing with loans. Someone applies for a loan, if the HR rep signs off on the loan again, no way that makes them a fiduciary (in my opinion) because again no discretion is involved to the extent it is allowed. Now, whoever sets the interest rate is a fiduciay, but simply signing off on a loan does not create fiduciary status (my opinion again).

In my humble opinion, not every single person involved in plan administration is a fiduciary.

An interesting view point. I always understood that the only people with authority to sign off on a distribution (whether or not the distribution required discretion) were the plan's fiduciariaries.

[PLAN MAN]

"Following the terms of the plan is not a fiduciary function. A fiduciary is one HAS DISCRETION over plan assets" - you're missing a big part, it is not just about assets.

From the DOL's 'Meeting Your Fiduciary Responsibilities' publication: A plan must have at least one fiduciary (a person or entity) named in the written plan, or through a process described in the plan, as having control over the plan’s operation.

A fiduciary is someone who uses discretion in administering and managing a plan. What you seem to be saying is the individual participant makes the determination that they have an event that qualifies for a hardship and the plan administrator just follows the steps to make the distribution. Somewhere there should be procedures established by the plan administrator as to what qualifies for a hardship, what information is necessary to document the hardship and what is the approval process. I agree, the HR person just following the procedures is not a fiduciary, but if they have to make a determination that the event qualifies as a hardship (someone other than the participant must make this determination) then they may be considered a fiduciary.

[J Simmons]

Following the terms of the plan is not a fiduciary function.

If in the context of a given situation, the plan terms are specific enough that following them requires no judgment call--then you'd be acting 'clerically'. If in the context of a given situation, the plan terms are a bit vague and a decision has to be made which way to go, then I think the person making that decision has fiduciary duty to do so with prudence, solely in the interests of the plan participants and beneficiaries.

If someone terminates employment and the HR rep signs off on the John Hancock form, there's no way that makes them a fiduciary.

So why do you think John Hancock requires the HR rep to sign off rather than John Hancock just making the distribution without an HR rep sign off?

A hardship is only one level of "gray" above a termination distribution.

What constitutes a sufficient 'eviction' notice? Judgment call in many cases, as sometimes the mortgage holder's letters after the employee falls behind on 3 or 4 payments sound pretty threatening to the employee, but stop short of being a formal notice of foreclosure that starts the foreclosure process in that state.

Now, whoever sets the interest rate is a fiduciay, but simply signing off on a loan does not create fiduciary status (my opinion again).

If the participant loan program specifies, e.g., that the interest rate is to be the WSJ Prime plus 1 as of the date the loan application is signed, then I don't think someone who merely looks up the WSJ Prime rate on the date of application and adds one point to 'set the interest rate' is a fiduciary. However, if the loan program is vague (requiring, for example, nothing more than a "commercially reasonable rate"), then how to go about determining that rate and actually determining it from the info collected is fiduciary.

In my humble opinion, not every single person involved in plan administration is a fiduciary.

In my opinion, I think that virtually every one involved in plan administration has come across situations where the terms of the plan were not sufficiently clear that applying them was a mere matter of rote, clerical application, but have in fact made discretionary decisions--that is, acted as a fiduciary.

[Bill Presson]

I know this is a bit of a hijack, but what are your thoughts on what would be the real downfall of a TPA agreeing to serve in a fiduciary capacity? With the current legal environment, we're all already at risk anyway.

[Guest Sieve]

1 - Reporting that someone terminated employment would not be a fiduciary duty--but fraudulently reporting a termination of employment when there was NOT a termination of employment, causing a distribution to occur that ought not to have occurred, IS a fiduciary action. Reporting that John P. Smith terminated employment, when actually it actually was John R. Smith who terminated, also is a fiduciary breach (albeit inadvertent) if, as a direct result of the report, an involuntary distribution of $900 is made.

2 - A participant does NOT determine if a hardship has occurred--only that he/she needs money because there has been an expense to pay a doctor and he/she therefore believes that a hardship distribution ought to be authorized. The actual determination of a hardship requires an interpretation of the regs and the document, and an administrative determination of what proof is needed. (For example, payment to a plastic surgeon likely would cause a participant to believe that it is a hardship medical expense--but, more than likely, it is not a hardship (not a deductible medical expense), and therefore sending copies of those medical bills to a TPA does not magically make that a SH hardship distribution relieving someone (the TPA?) from an independent determination of whether there is, in fact, a hardship.)

3 - Some of us ought to re-read the definition of fiduciary under ERISA (Section 3(21(A)):

" . . . a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of the plan or exercises

any authority or control

respecting management or disposition of its assets . . ." (Emphasis added.)

So, anyone who "exercises any . . . control respecting . . . disposition of [plan] assets"--WHETHER OR NOT THAT CONTROL IS DISCRETIONARY--can act as a fiduciary. Hence, the payroll clerk writing plan distribution checks as directed would be a fiduciary if he/she decided to cut a check to a non-existent participant and pocketed the money--as would a payroll clerk who inadvertently wrote a distribution check for $9,100 when it should have been for $1,900. As would, I believe, a TPA who makes an independent determination of hardship status (is that not, at a minimum, disretionary authority to manage the plan by interpreting whether the plan authorizes an in-service distribution under those circumstances?) . . .

[J Simmons]

1 - Reporting that someone terminated employment would not be a fiduciary duty--but fraudulently reporting a termination of employment when there was NOT a termination of employment, causing a distribution to occur that ought not to have occurred, IS a fiduciary action.

* * * * *

So, anyone who "exercises any . . . control respecting . . . disposition of [plan] assets"--WHETHER OR NOT THAT CONTROL IS DISCRETIONARY--can act as a fiduciary. Hence, the payroll clerk writing plan distribution checks as directed would be a fiduciary if he/she decided to cut a check to a non-existent participant and pocketed the money--as would a payroll clerk who inadvertently wrote a distribution check for $9,100 when it should have been for $1,900. As would, I believe, a TPA who makes an independent determination of hardship status (is that not, at a minimum, disretioanry authority to manage the plan by interpreting whether the plan authorizes an in-service distribution under these circumstances?) . . .

Larry, if I am understanding what you are saying in these two statements is that if the act is clerical and correct, the actor is not a fiduciary, but if the act is clerical and wrong (even inadvertently) the actor by reason of performing it wrong becomes a fiduciary. I would think that whether an act is or is not fiduciary is not dependent on whether the person performed the act correctly, but depends on the nature of the act undertaken in the first place. I.e., whether the act involves discretion. If it is a fiduciary act and the actor gets it wrong, then I think that there has been a fiduciary breach. But I don't see it as one who makes a clerical mistake thereby becoming a fiduciary.

3 - Some of us ought to re-read the definition of fiduciary under ERISA (Section 3(21(A)):

" . . . a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of the plan or exercises

any authority or control

respecting management or disposition of its assets . . ." (Emphasis added.)

So, anyone who "exercises any . . . control respecting . . . disposition of [plan] assets"--WHETHER OR NOT THAT CONTROL IS DISCRETIONARY--can act as a fiduciary. Hence, the payroll clerk writing plan distribution checks as directed would be a fiduciary if he/she decided to cut a check to a non-existent participant and pocketed the money--as would a payroll clerk who inadvertently wrote a distribution check for $9,100 when it should have been for $1,900.

In the ERISA bonding context, handling plan funds has been fleshed out further.

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."

[austin3515]

Sieve, again, I just can't see the relevance for 2/3 of what you're writing. How is fraud and blatant errors in any way related to the question I've set forth? Another example along the same lines might be, we botch the APD test and tell the client to send out refunds for the Plan. Is that a fiduciary act on our part? I think the more relevant question in that situation is what does our E&O policy cover? (thankfully, I've never had to find out!!)

Would you kindly clarify that at the heart of the issue is what constitutes discretionary authority over plan assets? In your eyes it's black and white, but I've polled other equally impressive people (you're posts make it clear you're in their arena) and they say "it's not clear."

I concede it is definitely a gray area, with compelling arguments on both sides...

[PLAN MAN]

It is a gray area that may become clear only when the DOL or IRS comes to audit. They are going to be looking at the actions taken to determine who is a fiduciary. Saying you're not a fiduciary doesn't keep you from being one.

The ultimate responsibility falls on the plan administrator/plan sponsor. If the service agreement does not make clear what responsibilities and liabilities the service provider has, then the plan administrator may think the provider is responsible for more than they are.

[Guest Sieve]

austin --

Portions of my earlier response were directed to statements you and others made that also had nothing to do with your OP--such as your statement that "If someone terminates employment and the HR rep signs off on the John Hancock form, there's no way that makes them a fiduciary".

The point of my position is that (i) the determination of whether someone is a fiduciary is based on the facts & circumstances of the situation, & (ii) therefore we may never know whether someone is truly a fiduciary (including the above HR rep) because one slight change in the facts, or one fact that we do not know, may make all the difference. Your asking for some kind of assurance that you are NOT a fiduciary will, in fact, likely result in a false belief that you could never become a fiduciary in that capacity--which I think is a bit of a dangerous leap, since, in the fiduciary "to the extent that" arena, such a blanket assurance is pretty dangerous.

The regs indicate that some people, as a direct result of their position (such as the Administrator and Trustee), are, by definition, fiduciaries, and others (such as those listed in Q&A D-2 of DOL Reg. Section 2509.75-8) are not fiduciaries. But, those listed as automatically not being fiduciaries are treated as such only if they perform "purely ministerial functions", which therefore causes them not to fit the definition of fiduciary because they do not have (i) any discretion with respect to management of the plan, nor (ii) any control over disposition of assets. But, as soon as a person--whose job with respect to the plan specifically requires and provides for no management discretion and no control over asset disposition--takes an action outside of his/her limited job description which therefore causes that person to fit within the definition of fiduciary with respect to a single act (e.g., the last person in line purposely cutting a check for $2,000 more than authorized/requested), then that specific act is a fiduciary act, no matter what that person's specific duties and responsibilities might have been, and the individual becomes a fiduciary to the extent of that single act. I like to look at this entire fiduciary framework as being used to determine if a fiduciary act occured, in which case the taker of that act became a fiduciary to the extent of the act, rather than being a situation in which individuals are labelled as either fiduciaries or non-fiduciaries.

A person (other than an Administrator, Trustee, named fiduciary) is or is not a fiduciary based on the acts that the person actually, in fact, performs--that's the "to the extent that" language in the statute--and I've always believed that a service agreement cannot remove fiduciary status from a provider who agrees to perform, and does perform, fiduciary functions. A named fiduciary (such as the Administrator) can designate someone else to carry out the named fiduciary's fiduciary responsibilities, in which case the named fiduciary is not responsible for a breach of those responsibilities by the other person (ERISA Section 405©(1)). Logic would dicatate that the one to whom the fiduciary duties have been delegated by the named fiduciary will, then, become a fiduciary with respect to those fiduciary duties. So, in those instances, a service agreement which states, for example, that "I will be solely responsible for making the determination of whether or not someone is entitled to a hardship distribution, but I will not, under any circumstances, ever be considered a fiduciary as a result of that act despite my agreement to perform those acts" may not protect someone who does, in fact, act in a fiduciary capacity with respect to that determination (by making, let's say, the determination that the individual is a dependent and is enrolling in post-secondary educaton for the semester). (See ERISA Section 410(a): " . . . any provision in an agreement . . . which purports to relieve a fiduciary from responsibility or liability for any [fiduciary] responsibility, obligation or duty . . . shall be void as against public policy.")

For example, if, in your OP, you happen to know that the client relies on your hardship determination entirely, and does not ever review the material you forward, and did not really approve the checklist in advance as much as defer entirely to you and your "expertise" for a form that you had prepared and forwarded for signature without explanation, and would sign anything you put in front him/her, and never asks questions, and shuns direct contact with participants entirely and directs all hardship inquiries/issues/determinations to you—then, in that case, perhaps you are a fiduciary. For all we know, that's the case.

So, yes, it's a grey area & it's not clear--that's what you wanted to hear, right?--because all the facts must be flushed out, and your potential protections contained in the service agreement must be analyzed against the breach that you supposedly have caused. Additional guidance by the DOL would do little, in my estimation, because fiduciary determination is generally so fact-intensive. That's why reliance on cases that say an actuary or lawyer or TPA is not a fiduciary are often misplaced, since the cases usually are very fact specific.

OK, perhaps John is correct that a typo on a check would not be a fiduciary breach. But if the typo was sufficiently significant, and the employer had to replace an inadvertent $100,000 excess distribution, it certainly would have been a fiduciary breach by someone, because only fiduciary breaches—I believe—permit corrective contributions to occur. If the clerk who cut the check and was the last one to touch it did not cause the fiduciary breach--and it is not necessary that a fiduciary breach be based on negligence--then who, pray tell, committed the fiduciary breech which caused an extra $100,000 to be distributed? And, John, I'm also not convinced that regs relating to the interpretation of "handling funds" for purposes of ERISA's bonding requirements have any bearing on the determination of who might be a fiduciary or what might cause someone to be a fiduciary.

[J Simmons]

OK, perhaps ... a typo on a check would not be a fiduciary breach. But if the typo was sufficiently significant, and the employer had to replace an inadvertent $100,000 excess distribution, it certainly would have been a fiduciary breach by someone, ... .

Agreed. If the PA delegates a task to another, and that other makes an error that amounts to a lack of prudence/acting in the sole interests of the participants and beneficiary, then either the PA or the other has committed a fiduciary breach. Which one? That's where I'd argue the agreement between them becomes crucial. Analytically, I think you start with the PA, a plan document specified fiduciary. If the PA can demonstrate that (a) it contracted away that task with no reserved supervisory role by the PA (and in practice, did not supervise each performance), and (b) the PA had no reason prior to the act in question to suspect that the service provider was incapable or not responsible to carry out the act appropriately, then I think the PA is off the hook. In that instance, the service provider is a fiduciary to the extent performing the task involves discretion, and failure to act prudently/exclusively is a breach of that fiduciary duty.

If the service contract/arrangement is that the service provider will do the preliminary work and assessment--such as with a hardship request--but the PA then reviews and approves/denies, then the PA is the fiduciary, not the service provider. I think if the agreement calls for such a role by the PA but the PA fails to do the reviews and merely signs off on anything, I yet think the PA is the breaching fiduciary, and not the service provider. This is my opinion even if the service provider knows that the PA has basically abdicated its role in this regard and is signing off on anything that the service provider puts under the PA's nose. The reason is that is the division of responsibility per the service agreement. If the service provider fulfills its agreed-to role, it does not become a fiduciary simply because it knows the PA is failing properly to perform its reserved function and role. So I think that the service agreement, and in particular its division of responsibilities, is critically important to whether the service provider may be tagged to be a fiduciary (but I agree that if those responsibilities for the service provider render it to be a fiduciary, a self-serving clause elsewhere in the agreement that the service provider shall not be an ERISA fiduciary will not carry the day in most courts).

And, John, I'm also not convinced that regs relating to the interpretation of "handling funds" for purposes of ERISA's bonding requirements have any bearing on the determination of who might be a fiduciary or what might cause someone to be a fiduciary.

I agree, it does not necessarily apply, but it is a closely related issue. You only bond ERISA fiduciaries, and so the bonding regs defining what is an ERISA fiduciary (that needs to be bonded) and which were issued by the same agency (DoL) as part of its interpretation of the same act (ERISA) would seem to carry a fair amount of weight with most judges.

Also, Larry, I wholeheartedly agree with the notions that you've discussed that fiduciary (or not) is on an act by act basis, not a label for the person for all purposes (unless named as PA, TEE or named fiduciary in the plan documents) and that it is extremely fact/situation sensitive.

In sum, I would suggest that a service provider (a) get a well drafted service agreement that yet calls for the PA to review and make all decisions on matters that might be prepared for the PA's review, and (b) nevertheless act prudently at all times.