How often is the employer the retirement plan’s only fiduciary?

[Peter Gulia]

For a single-employer individual-account (defined-contribution) retirement plan, typically the employer, or some committee or officer of it, is the plan’s administrator.

Of those, for some a bank or trust company is the plan’s trustee, but for others only people associated with the employer are trustees.

(For the question I ask here, let’s leave aside an investment adviser, even if it is a fiduciary.)

So, how often does it happen that both the administrator and trustee roles are filled by the employer?

My query is only to support a lesson I teach my law school students. Any information you share I’ll use only with nothing identifying, and only in a very wide generalization.

 

[Gina Alsdorf]

In my experience where a bank is involved, it is usually acting as a directed trustee/custodian.  They limit their fiduciary duties substantially by having a contract that directs them to perform certain activities and specifies exactly how they are to be performed. The plan sponsor is usually the named administrator and trustee.  The same is true for 3(16) Plan Administrators.  Most have contracts and processes and procedures that limit what services they are performing and how they will be performed.  I have very rarely seen a 3(16) named in the plan document, taking on the whole enchilada. I will say, the larger the plan the more likely they will have more fiduciaries in the mix.   

[Peter Gulia]

Gina Alsdorf, thank you.

And BenefitsLink neighbors, I apologize for not saying: my query is focused on small-business employers with small plans.

[Bri]

If I've had more than 15 plans in 25+ years where the trustees weren't just the owners or an executive committee (small businesses almost exclusively), I'd be surprised.

[Peter Gulia]

Bri, thanks; just what I was looking for.

For those plans, if a fiduciary breached one’s responsibility—for example, by failing to cause participant contributions withheld from wages to be paid into the plan’s trust, is there any fiduciary available who would call to attention the breach?

[Belgarath]

Leaving aside the investment advisor, most of our small plans have either one or two Trustees. Just at a ballpark estimate, I'd say about 20% have only one Trustee, the other 80% have two or more. And no, for the 1-Trustee plans, I'd say there is no other fiduciary who would call attention to a breach.

[Peter Gulia]

Belgarath, thanks.

If all trustees (whether one, two, three, or more) are associated with the employer, how likely is it that any trustee will call attention to the employer’s failure to pay into the plan’s trust participant contributions withheld from wages?

How likely or unlikely is it that an investment adviser would know that participant contributions withheld from wages were not paid into the plan’s trust?

(I can use that information when I turn to the semester’s lesson about cofiduciary responsibility.)

[Bri]

Peter - I'd say that the "owner/trustee" only realizes there might have been a missed/late payroll deposit when the TPA notices it as part of the year-end reconciliation.

[Belgarath]

Hi Peter - hard to say - I never see the plans where everything goes well - questions only come to me when there's a problem, so sometimes my perceptions are a bit skewed. If I had to guess, I'd agree with Bri most of the time - maybe 80% we find it, 20% they find it internally. And the ones who discover it internally are usually the ones who have been through it and received our assistance with appropriate correction before!

[Paul I]

I agree with @Bri that the individual trustee(s) of most small plans are associated with or part of the management of the employer.  For many of these companies, all of the decision-making for the companies is concentrated within a group of 5 or fewer individuals, and the duties of the plan administrator are performed by individuals within that group, and the trustee is also within that group.

When the company is named in the plan document as the Plan Administrator, often no one in the management of the company is specifically designated to have that responsibility, but the trustees often are clearly identified in the plan document.  Often, the trustees are one or more of the owners, the individual named as the president/general partner, or the treasurer, and the focus of the trustees is on the investment menu.  They leave (and don't ask, don't tell) plan operational considerations to others such as human resources or payroll.

It is fairly common that only or two individuals have hand-on knowledge of the operations of the plan, and these individuals most often have some responsibility for the company's payroll.  As a result, they should know about any missed/late payroll deposits, but often they do not know the timing requirements for the making deposits to raise the issue with others.  Note that, in an effort not to be considered a plan fiduciary, outside payroll providers generally do not alert the company about late deposits.

Investment advisers go out of their way to disavow any responsibility for fiduciary responsibility, and to limit their services to at most the oversight of the investment fund menu.  Some advisers may comment to the company about a late payroll, but this comment primarily is in response to their keeping tabs on asset growth and associated adviser fees tied to deposits or asset balances.

Most recordkeepers will alert a client if a routine payroll is not timely deposited.  The alert occurs after the fact and at best is accompanied by a message that a correction may be needed.  The service agreement does not include any accountability resulting from missed or late deposits.

All of the above being said, the decision on whether to have an independent trustee often comes down to the company not wanting to pay a fee no matter how small that fee may be.

[Peter Gulia]

Thanks, all. Here’s a follow-up question:

In February 2008, EBSA released Field Assistance Bulletin 2008-01, which describes an interpretation that there must be some fiduciary who has responsibility to collect contributions owing to the plan. And that a trustee, even if a directed trustee, has that responsibility unless a document (which might be a trust agreement, but could be something else) specifies the other fiduciary who has that responsibility.

Following this, some designers of IRS-preapproved documents added an adoption-agreement item or administrative-specifications item to name the fiduciary who has the responsibility to collect contributions. Of these, some present a set of checkbox choices and a fill-in line; some, just a fill-in line.

Whom does a small-business employer specify?

If an “institutional” trustee is unwilling to be named as the contribution-collection fiduciary, whom does a small-business employer specify?

[Gina Alsdorf]

Interestingly some of the custodians require you to name a special trustee for this purpose.  Small market it's almost 100% just the employer.

[Peter Gulia]

For this “special trustee” position, does a small-business employer name the employer corporation, company, or partnership itself, or does one name a human or officeholder?

[Gina Alsdorf]

I am actually not sure.  I was never involved at the signing stage.  I think a couple of the larger document providers put it in their mass submitter documents.  I want to say ASC and Relius (or whatever name you know them by) both have it.  It was because of the change in the law none of the Custodian's wanted that duty at all. 

[QDROphile]

The employer, other than a sole proprietor, should never be the sole or the discretionary fiduciary except to the extent of the initial appointment of the discretionary fiduciary. Your (dear reader) puzzlement or immediate vehement disagreement with this assertion is the best evidence that the proscription is not observed.

[Gina Alsdorf]

QDROphile I agree with you completely and yet...

[Peter Gulia]

Legislating in the 1960s and early 1970s for what became ERISA involved many political compromises. Among them is allowing an employer, or people dependent on the employer, to serve as its plan’s named fiduciary. (I sometimes call that ERISA’s fatal flaw.)

About situations in which not paying over a contribution is intentional, often a wrongdoer who decided not to pay over a contribution is the plan’s trustee or contribution-collection fiduciary, or can dominate the person so appointed. Other times, the contribution-collection fiduciary is the employer business organization.

[david rigby]

2 hours ago, Peter Gulia said:

Legislating in the 1960s and early 1970s for what became ERISA involved many political compromises. Among them is allowing an employer, or people dependent on the employer, to serve as its plan’s named fiduciary. (I sometimes call that ERISA’s fatal flaw.)

Sure, but some of those employers began as single-life entities and exempt from much of ERISA.  Those employers had no interest in hiring a professional PA.  In such cases, the "flaw" is not re-evaluating the plan's administrative policies/procedures when the employer (and the plan) grew larger.

[Gina Alsdorf]

They do enforce some of these as criminal charges, the problem is proving that the employer knew they shouldn't do it.  You need to show scienter. I've seen it successfully done a few times. In all the cases the DOL had already had an investigation of the plan, told the employer not to do it in writing and the employer did it again. There was also a DOL Contributory Plans Criminal Project back in the 10s.  They had a lot of indictments and convictions that year.  

[Roycal]

We could write a whole book on this subject, could we not?  Just a couple of points.

From the ERISA definitions: Sec. 3(16)(A)(i) & (ii).  First, 3(16)(A)(i) provides that the "administrator" (not plan administrator, although that's the obvious meaning): is "the person specifically so designated by the terms of the instrument under which the plan is operated."  Second, 3(16)(A)(ii) provides that if no one is expressly designated as administrator, the "plan sponsor" is the administrator.  When I was in the business of drafting plans I'd always specifically designate the plan sponsor (normally the employer) as the administrator of the plan.  Although I say "always," I cannot swear that there no exceptions.  I took this approach with employers small and very large because the statute pointed in that direction and because since it's the employer's plan, the employer is the logical person to saddle with the legal responsibilities and liabilities of the administrator.  Note that ERISA includes the term "plan administrator" 149 times and the term "administrator" alone 102 times.

The term "named fiduciary" also comes into play.  The term is used 20 times in ERISA and is defined in Sec. 402(a)(2) as follows: ‘‘'named fiduciary'’’ means a fiduciary who is named in the plan instrument, or who, pursuant to a procedure specified in the plan, is identified as a fiduciary (A) by a person who is an employer or employee organization with respect to the plan or (B) by such an employer and such an employee organization acting jointly." Backing up a paragraph, Sec. 402(a)(1) says that the instrument establishing the plan must "provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan."  Again, I "always" designated the plan sponsor/employer as a named fiduciary because, in my opinion, the employer is the person whose plan it is and who therefore should "have authority to control and manage the operation and administration of the plan."

Of course, there will always be real people who will be causing the employer (here I am speaking of a corporation as the employer) to act -- H.R. people, finance people, etc.  If they believe that by acting as employees of the employer they are going to avoid personal fiduciary responsibility, good luck with that.  To anyone, a natural person, who touches a plan's operations, inside the employer or outside (such as a TPA or "directed" trustee), caveat emptor.

[QDROphile]

Your last paragraph illustrates why naming the employer as the fiduciary with discretionary authority is a bad idea. If the employer is the fiduciary, that creates a presumption that the directors and the senior officers are the warm bodied persons who are acting as the fiduciary (and therefore potentially have fiduciary liability) because it is through those persons that the employer acts in any capacity. If those persons do not know that they are potentially responsible for fiduciary matters, it is impossible for them to properly discharge their duties. I think the directors of a corporation would be totally surprised to know that they have some duty (and potential liability) with respect to plan administration, even though many D&O and E&O policies cover liability to some extent. Instead, the appropriate persons (the persons who really have the responsibility and should be attending to it) should be designated by name or office as a named fiduciary. For example, the CEO could be designated as the named fiduciary for the plan. It is likely that the CEO is going to be making discretionary decisions anyway (such as engaging the trustee and naming other fiduciary with specific roles), so make it explicit. You still have the problem that if anybody involved with the plan does not know their job or do it correctly, and oversteps into fiduciary action, that person is potentially going to have fiduciary liability. But if all fiduciaries are named and their respective duties defined, they have a fighting chance of acting correctly in their capacities and not overstepping into the province of another fiduciary’s responsibility.