What It Means To Be A Fiduciary Under ERISA


The Employee Retirement Income Security Act of 1974 (ERISA) sets out comprehensive standards of conduct for those who manage an employee benefit plan and its assets. In addition to a specific person being named in the plan document, a fiduciary is defined in ERISA as someone who: 1) exercises discretion over the management of the plan or authority over plan assets; 2) renders investment advice for a fee or other compensation, directly or indirectly; or, 3) has discretion over plan administrative issues. Fiduciaries must discharge their duties solely in the interest of the plan’s participants and efficacies and exclusively for the purpose of providing benefits to plan participants and beneficiaries. At the heart of the fiduciary role is working for the sole benefit of the participants and beneficiaries. Among other things, this includes selecting and monitoring plan investments, monitoring plan costs for reasonableness, and overseeing and properly documenting plan administration. These responsibilities bring with them potential liability.

Plan Investments

It isn’t enough to say, “I don’t know anything about investments”. If that is the case, you need to solicit the help of a professional. To reduce these obligations, plan sponsors often rely upon outside experts to assist them, particularly with investment decisions. At least one court, in Katsaros v. Cody, took the position that, “Where a trustee does not possess the education, experience and skill required to make a decision concerning the investment of a plan’s assets, he (i.e. the fiduciary) has an affirmative duty to seek independent counsel in making the decision.”[1] A fiduciary process that entails finding the very cheapest service providers with the very cheapest investments carries a chance of liability if anything were to ever go wrong with those providers or chosen investments. The fiduciary process is not one that simply has a pre-ordained solution in mind. If that were the case, ERISA would define the exact fee considered reasonable for an ad-visor. The law is to have a fiduciary process and pay reasonable fees. It may be the case that an all index lineup is in the best interest of the participants, but if a documented process of examining the participants and all applicable investments was not followed, you may be liable and subject to hindsight analysis, because you had no process.

Another factor to consider is the number of choices or decisions that participants must make to begin participating in the plan. Fiduciaries have a duty to diversify the plan’s investments so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. But at the same time, literature is clear that too many choices are confusing to participants and can cause decision paralysis. Participants are hesitant to make a decision or may not participate at all. Research has found that, as it relates to retirement plan participation, for every 10 funds added to a plan, the predicted participation rate drops by 2%, and there is a 5.4% increase in the allocation to money market and bond funds.[2]

Plan Costs

In Tussey vs. ABB, Inc., the court ruled that: “ABB Defendants violated their fiduciary duties to the Plan when they failed to monitor recordkeeping costs, failed to negotiate rebates for the Plan…and selected more expensive share classes for the Plan’s investment platform when less expensive share classes were available. ABB, Inc., and the Employee Benefits Committee violated their fiduciary duties to the Plan when they agreed to pay an amount that exceeded market costs for Plan services in order to subsidize the corporate services.”[3]

Mutual fund companies typically offer two classes of shares: retail and institutional. Retail shares are the same share class offered to individual investors. Institutional share classes are available to investors with larger amounts to invest and are typically accompanied by lower fees. Often, a plan will be invested in a retail share class even though it is eligible for an institutional share class. The plan should purchase the share class with the lowest cost unless there is a clearly apparent and defensible reason to purchase a higher cost share class. Institutional share classes may not be available to a plan due to a minimum asset threshold, but fiduciaries will want to monitor what is available when a plan ultimately reaches that threshold. If you are paying 10bps more than you should, that adds up quickly.

When looking at total plan costs, fiduciaries should decouple admin fees from investment management fees. Looking at total plan costs as a whole is not adequate. All fees should be reason-able (i.e. Recordkeeping, inv mgmt., etc.). The fee disclosure rules developed by the DOL, in particular 408(b)(2), should give the fiduciary the necessary information to determine if fees are reasonable. It is up to the fiduciary to understand the information provided and determine if the aggregate fees are reasonable. For example, if you are looking at total plan costs of two plans with the same amount of assets, one of which has only index funds, and the other has actively man-aged funds, and they have the same overall cost, the administration costs are likely too high for the plan with only index funds.

Further, fiduciaries must avoid conflicts of interest and acts of self-dealing. One such example is a plan sponsor using a large recordkeeper for corporate services in addition to 401k plan servicing. That large recordkeeper might be operating at a loss on the corporate services but making a large profit on the 401k plan to make up that loss. Participants are essentially subsidizing corporate expenses with their retirement assets. Fiduciaries must monitor the performance of the plan’s service providers to determine if their selection remains prudent. Even if a service provider’s performance is adequate, the fiduciary should periodically invite service providers to submit proposals to determine if a different provider would be a less expensive and/or a better choice.

Plan Administration

Each fiduciary needs to be familiar with the provisions of the plan document. A retirement plan at its core is a contract between the employer/plan sponsor and the participants in the plan, and the terms of the contract/plan are in the plan document. These documents govern the fiduciary’s actions, and a failure to comply violates ERISA. Each fiduciary should know he or she is an ERISA fiduciary, understand what that means, and be familiar with the rules governing the plan’s operations, including the allocation of responsibilities among various fiduciaries. For ex-ample, members of an investment committee are typically not responsible for administration, and members of an administrative committee are typically not responsible for investments. This may require education and periodic reviews for the company’s management and/or board of directors.

Fiduciaries should meet regularly to review the plan’s operations and investment performance. Any decisions made in these meetings, and reasons for those decisions, should be documented in written minutes. Reports and analysis supporting the fiduciaries’ decisions should be included with the minutes. The minutes will serve to document that you executed your processes in the best interest of the participants. You will have the very information that you will need five years down the road, when you are sitting with a lawyer answering questions about your decisions.

ERISA does not explicitly require that plans maintain a written investment policy statement (IPS), but an IPS is vital to fiduciaries in satisfying their responsibilities under ERISA. Once established, an IPS should be part of the documents under which the plan is maintained, and there-fore it must be followed. A properly drafted investment policy statement provides the plan sponsor and fiduciaries with a roadmap for the general investment objectives of the plan, standards for meeting those objectives, and a tool for monitoring the performance of plan investments.


A fiduciary must carry out fiduciary functions solely in the interest of plan participants and beneficiaries. With that responsibility comes liability. ERISA doesn’t require fiduciaries to always be right; ERISA requires fiduciaries to be prudent. For purposes of ERISA, the linchpin of prudence is a process. So, when making decisions, establish a process you can execute and make sure it is documented and followed.

[1]Katsaros v. Cody, 568 F. Supp. 360 (E.D.N.Y. 1983)
[2]Iyengar, Sheena, and Wei Jiang, 2003, “How More Choices are Demotivating: Impact of More Options on 401(k) Investments,” working paper, Columbia University
[3]Source: US District Court, W.D. Missouri, Central Division, March 31, 2012