Fiduciary Status Under ERISA
Investment advice
Part (ii) of the fiduciary definition provides that a person will be a fiduciary to the extent that he or she renders investment advice for a fiduciary to the extent that he or she renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property or such plan (i.e., plan assets) or has any authority or responsibility to do so. A regulation issued by the Department of 29 CFR 2510.3-21(c) explains what constitutes "investment advice" for purposes of the fiduciary definition. Under the regulation, a person must either: have discretionary authority or control with respect to purchasing or selling securities or other property for a plan, OR satisfy the five-part test described below. All five parts of the five-part test must be satisfied to find fiduciary status by providing investment advice. The person, directly, or through or with an affiliate, must: 1. render advice as to the value of property, or as to the purchase or sale of securities or other property of the plan, 2. on a regular basis, 3.pursuant to a mutual agreement, arrangement or understanding that- 4. the advice will serve as a primary basis for investment decisions, and that 5. the person will render individualized investment advice based on the particular needs of the plan. The Department is currently re-considering the regulation's five-part test for "investment advice" for purposes of the fiduciary definition in light of industry changes over the years and abuses that have been found in investigations. A notice of proposed rulemaking was published in 2010 to solicit public comments regarding proposed changes to the test, including eliminating the "regular basis" and "primary basis for decision-making" requirements. The Department has announced that it will issue a re-proposal as the next step in this rulemaking. Until such time as any new final rule becomes effective, however, the five-part test continues to apply.
Trustees
Plan assets must be held in trust by one or more trustees, with certain exceptions (such as where plan assets consist of insurance contracts or policies). Trustees must be named in the trust or plan instrument, or appointed by a named fiduciary. Sec. 403 Trustees have exclusive authority and discretion to manage and control the assets of the plan except where: -the plan expressly provides that the trustees are subject to directions of a named fiduciary, OR -such authority has been delegated to one or more investment managers pursuant to section 402(c)(3). The exceptions are commonly used, but trustees remain fiduciaries, even if they have fewer fiduciary duties under the exceptions.
Inherently fiduciary positions
A few plan positions inherently involve functions described in the section 3(21)(A) definition of fiduciary and therefore always result in fiduciary status: Named Fiduciary Trustee Investment Manager as defined in section 3(38) Plan Administrator as defined in section 3(16)
Ministerial functions, examples
A person who performs purely ministerial functions for a plan within a framework of policies, interpretations, rules, practices and procedures made by other persons is generally not a fiduciary because: Such person does not have discretionary authority or responsibility regarding management or administration of the plan, does not exercise authority or control respecting the management or disposition of plan assets, and does not render investment advice with respect to plan assets and has no authority or responsibility to do so.
affiliates of fiduciaries
An affiliate of a fiduciary may itself be a fiduciary if it directly or indirectly controls the fiduciary activities of the fiduciary. The terms 'affiliate" and "control" are defined in 2510.3-21 (e). This is a factual determination requiring an analysis of the relevant facts and circumstances, including: the nature of the relationship between the fiduciary and the affiliate, and Whether the affiliate indirectly had discretion and control over plan assets because it effectively controlled the fiduciary.
Investment manager
Any person that manages "plan assets" is, under the section 3(21)(A) definition, a "fiduciary." Remember "fiduciary" is a functional test so this includes persons who manage plan investments, regardless of whether they satisfy the section 3(38) definition of "investment manager." - The section 3(38) definition relates to a limitation on trustee liability in section 405(d). - A section 3(38) investment manager must, among other things, be a bank, insurance company, or registered investment adviser appointed as an investment manager by a named fiduciary in accordance with ERISA section 402(c)(3), and must acknowledge fiduciary status in writing. - A trustee has no responsibility regarding assets under the authority or control of an investment manager appointed by the named fiduciary. The trustee retains full responsibility over plan assets managed by someone who is not such an investment manager.
Examples of ministerial functions that would generally NOT make someone a fiduciary:
Application of established plan rules for determining eligibility for participation or benefits ( if subject to review by the appropriate named plan fiduciary. Section 503(2).) Maintenance of participants' employment records Compilation of data and preparation of reports required by government agencies. Calculations of benefits Making recommendations to a plan fiduciary for decisions with respect to plan administration
Attorneys, accountants, actuaries
Attorneys, accountants and actuaries performing their usual professional functions will ordinarily not be fiduciaries, unless the facts in a particular case cause them to satisfy one of the elements of the definition of a fiduciary in section 3(21)(A). 29 CFR.75-5, D-1
Brokers, broker-dealers and banks
Brokers, broker-dealers and banks will not be fiduciaries merely by executing a plan fiduciary's direction to buy or sell securities for a plan within certain limitations described in the Department's fiduciary regulation at 29 CFR 2510.3-21(d). However, they may be fiduciaries if they otherwise satisfy the definition of fiduciary in section 3(21)(A), such as by exercising control over plan assets or by providing investment advice for a fee.
Definition of fiduciary
ERISA sec.3(9) defines a person" to include not only natural persons, but also entities such as corporations, partnerships, joint ventures, trusts, etc. Banks, insurance companies, committees and many other entities may be fiduciaries, in addition to individuals. Note that under section 3(21)(A), a person is a fiduciary " to the extent" that (s) he meets the fiduciary definition. Accordingly, a person can be a fiduciary for one purpose but not for another. This will be discussed further in the module on fiduciary liability. The concept of "plan assets" (discussed in a later module) is also important in determining fiduciary status. Many plan investment vehicles are considered to hold " plan assets" and persons who have or exercise control over, or give investment advice with respect to, plan assets will be fiduciaries.
Named fiduciary
ERISA-covered plans must be established and maintained pursuant to a written instrument that provides for one or more named fiduciaries who jointly or severally "have authority to control and manage the operation and administration of the plan." Sec. 402(a)(1) Accordingly, a named fiduciary will always be a fiduciary. A named fiduciary is a person named in the plan, or who, pursuant to a procedure in the plan, is identified as a fiduciary by an employer, employee organization, or both, that sponsor the plan. Sec. 402(a)(2) Where the named fiduciary is the employer that sponsors the plan, the plan document may provide for the designation of specified individuals to carry out the fiduciary duties, e.g., and administrative committee or the company's board of directors.
Plan administrator
Every plan must have a plan "administrator," defined in sec. 3(16) of ERISA, that has discretionary authority or discretionary responsibility for the administration of the plan, and therefore is a fiduciary. Others who provide administrative services to a plan (e.g., third party administrators, consultants) may or may not be fiduciaries, depending on the extent to which they have or exercise discretionary authority or responsibility. Administrative functions that do not involve discretion are sometimes referred to as "ministerial" functions.
Settlor v. fiduciary activities
Some decisions made by employers relate to the formation, amendment or termination of the plan, rather than the management of plans. These include most decisions involving the design of a plan. These decisions are called "settlor" decisions and are not fiduciary activities because they do not involve the kind of discretion or control contemplated by section 3(21)(A) of ERISA. See information Letter to John N. Erlenborn (03/13/86). Note, however, that certain activities that would be settlor activities for a single employer plan may be fiduciary activities in a multiemployer plan. See FAB 2002-02. Performance of settlor activities will not, by themselves, make a person a fiduciary. And a person who is otherwise a fiduciary will not be held liable as a fiduciary with respect to activities that are purely settlor activities. Nonetheless, the implementation of settlor decisions may involve fiduciary activities. The distinction between settlor and fiduciary activities is important not only for identifying fiduciaries, but also because plans may not pay for settlor expenses. Example One: While a decision to terminate a plan is a settlor decision, if distributions of plan assets upon plan termination are to be made in the form of annuities, the selection of the annuity provider (s) would be a fiduciary decision. Example two: A decision is made to offer a participant loan program in a pension plan. As a plan design decision, this would be considered a "settlor" decision. However, once the loan program is in the plan, decisions concerning loans issued pursuant to the loan program (e.g., interest rates, loan duration and security) are fiduciary decisions. There is an exception to plan design decisions being settlor decisions in cases where a plan has to be amended in order to satisfy a tax qualification requirement. The Department has taken the position that in some cases amendments required in order to maintain the tax qualified status of an existing plan can be fiduciary in nature, and that to the extent permitted under plan documents, plans may properly pay certain costs incurred in connection with making the amendments. See Advisory Opinion 2001-01A and related hypotheticals for more information and examples of the settlor/fiduciary distinction.
Functional test
The test whether a person is a fiduciary is functional, requiring analysis of whether, under the facts, a person has or exercises discretionary authority or control over the management of a plan or any authority or control over its assets, or has discretionary authority or control in the administration of the plan. No special appointment as a fiduciary is necessary. A person can be a fiduciary regardless of any contracts, agreements, understandings, titles or job descriptions stating that the person is not a fiduciary. Examples of activities that give rise to fiduciary status: appointing other plan fiduciaries Selecting and monitoring plan service providers Selecting and monitoring plan investment vehicles Making final determinations on benefits claim appeals
Consultants
Traditionally, consultants did not ordinarily provide services that resulted in fiduciary status. Today, many consultants provide a wider array of services, and may or may not satisfy the definition of fiduciary in section 3(21) (A). The fiduciary status of a consultant will often be based on: Whether it provides investment advice for a fee, its exercise of authority over plan assets, or whether it has or exercises discretionary authority over plan management or administration A consultant may also be a fiduciary if designated as the named fiduciary in plan documents.
Directed trustees
Trustees directed by a plan's named fiduciary may follow ONLY directions of the named fiduciary that are "proper," which means": - in accordance with the terms of the plan, and - not contrary to ERISA. Sec.403(a)(1) Because directed trustees are responsible for determining that a direction is proper before following it, they have "residual" fiduciary responsibilities. The Department has issued a Field Assistance Bulletin (FAB) that provides a detailed description of the fiduciary responsibilities of directed trustees. FAB 2004-03
Importance of fiduciary status
Under ERISA fiduciaries are, in general, persons (both individuals and entities) who (1) have any discretionary authority or control over the management and operation of a plan, or have or exercise any authority or control over the assets of a plan, (2) provide certain types of investment advice for a fee with regard to assets of a plan or (3) have any discretionary authority or responsibility in the administration of a plan. Fiduciaries are subject to strict standards of conduct under ERISA (called fiduciary responsibilities) and are personally liable for losses resulting from fiduciary breaches.
Examples of fiduciary status
What constitutes a "fee or other compensation, direct or indirect" for investment advice? Fees for investment advice for purposes of the sec. 3(21) (A) definition of "fiduciary" include both direct and indirect fees as well as other forms of compensation. For example, a provider of investment advice might receive indirect compensation from the issuer of an investment product that a plan purchases upon his or her recommendation, or compensation in a form other than money, such as research reports, trips to conferences, etc. What if a broker provides advice but is compensated only through brokerage commissions? Many brokers provide investment advice but do not receive separate fees or compensation for such advice outside of their brokerage commissions for executing securities transactions. The Department stated that in such a situation it is reasonable to expect, even in the absence of a distinct and identifiable fee for the advice, that a portion of the broker's commission represents compensation for the provision of investment advice. Advisory Opinion 83-60A (Nov.21, 1983) The investment advice provisions of the fiduciary definition and regulation apply in the same manner when the advice is provided directly to participants and beneficiaries regarding plan assets in their individual plan accounts, as these provisions would apply if the investment advice was to a plan fiduciary. To encourage the provision of investment education to participants and beneficiaries who direct the investment of their plan accounts, the Department issued an interpretive Bulletin (IB) at 29 CFR 2509.96-1. IB 96-1 distinguishes between investment advice and investment education, and describes types of information that can be provided to participants and beneficiaries without causing the provider to become a fiduciary by reason of providing investment advice. Categories of information described in IB 96-1 that will not be considered to be "investment advice" so as to give rise to fiduciary status include: general plan information certain information about investment alternatives offered under the plan (investment objectives, returns, etc.) general asset allocation models and certain interactive investment materials. IB 96-1 discusses each of these categories in detail.