Investment Fiduciary

The FT William pre-approved document allows us to select whether the Investment Fiduciary will be if not the Trustee.  Has anyone ever seen this used to name someone other than the Trustee (my plan does not have a directed trustee).

It looks like the default investment fiduciary is the plan sponsor. That doesn;t seem normal though because the norm is for the trustee to sign off on investment changes for example.

Here’s how ERISA sections 402, 403, and 405 work.

ERISA § 403(a)’s starting point is that a plan’s trustee has responsibility to invest the trust’s assets. But that subsection has two exceptions:

ERISA § 403(a)(1):  A plan may provide that a trustee follows the proper directions of a named fiduciary that is not a trustee.

Often, that directing fiduciary is the plan’s administrator. If the plan provides participant-directed investment, the administrator might specify the plan’s investment alternatives, designated and nondesignated. Also, the directions a directed trustee receives might include a direction to follow participants’, beneficiaries’, and alternate payees’ directions within the investment alternatives.

ERISA § 403(a)(2):  All or some investment authority might be delegated to a § 3(38) investment manager.

Some publishers of IRS-preapproved documents include a spot for naming an Investment Manager or an “Investment Fiduciary”.

A plan’s administrator or a discretionary trustee might appoint [ERISA § 402(c)(3)] an investment manager to decide—with no approval from an employer, administrator, or trustee—the plan’s menu of designated investment alternatives. You might be surprised by how many small plans do this.

It’s not a surprise that an IRS-preapproved document sets up the plan’s administrator as the default investment fiduciary. Many documents are designed so a trustee is a directed trustee, with fiduciary discretion narrowed to no more than deciding whether a direction is improper.

ERISA § 402 http://uscode.house.gov/view.xhtml?hl=false&edition=prelim&req=granuleid%3AUSC-prelim-title29-section1102&f=treesort&num=0&saved=%7CKHRpdGxlOjI5IHNlY3Rpb246MTEwMiBlZGl0aW9uOnByZWxpbSkgT1IgKGdyYW51bGVpZDpVU0MtcHJlbGltLXRpdGxlMjktc2VjdGlvbjExMDIp%7CdHJlZXNvcnQ%3D%7C%7C0%7Cfalse%7Cprelim.

ERISA § 403 http://uscode.house.gov/view.xhtml?hl=false&edition=prelim&req=granuleid%3AUSC-prelim-title29-section1103&f=treesort&num=0&saved=%7CKHRpdGxlOjI5IHNlY3Rpb246MTEwMiBlZGl0aW9uOnByZWxpbSkgT1IgKGdyYW51bGVpZDpVU0MtcHJlbGltLXRpdGxlMjktc2VjdGlvbjExMDIp%7CdHJlZXNvcnQ%3D%7C%7C0%7Cfalse%7Cprelim

This is not advice to anyone.

A nice summary, Peter. The important practical point is that it should be a very conscious decision about which fiduciary is responsible for investments. Then, work through the plan terms to make sure that that fiduciary is is named by following the correct procedures for identifying the various fiduciaries and their roles. The worst thing that can happen is that someone becomes a fiduciary without knowing that they bear that responsibility, by default, by mistake, or by ignorance.

One hopes that plan terms, or trust terms, provide express authority with respect to appointment of fiduciaries. Sometimes the authority to appoint is implicit. A recent question in the message boards about use of custom documents is relevant here. Custom documents, drafted with regard for fiduciary and other ERISA concerns, rather than simply tax compliance, will probably have more understandable and accommodating provisions with respect to management of investments and other fiduciary duties. The IRS is not looking out for those aspects that apply to plan operation and liabilities.

Also remember that most of the time a fiduciary that appoints another fiduciary for a specified purpose, such as identifying and managing investments, still has some responsibility to monitor the activities of that fiduciary.