Who is a fiduciary?

Part One: Fiduciary Rules

Employee benefit plans, including retirement plans, offer many benefits for both you (the employer) and your employees. Although the Employee Retirement Income Security Act of 1974 (ERISA), as amended has long imposed standards on those who manage such plans, retirement plan litigation and media attention continues to draw considerable focus on employee benefit plan governance. Given this scrutiny, it is imperative that employee benefit plan fiduciaries understand their responsibilities and continually adhere to the standards that apply to them. The information in this Learning Center is designed to provide an overview of ERISA’s provisions to assist you in complying with ERISA’s fiduciary responsibilities and other requirements.

Named fiduciaries

Every employee benefit plan must provide for one or more “named fiduciaries” with the authority to control the operation and administration of the plan. The named fiduciary is identified in the plan document or pursuant to a procedure specified in the plan. In addition, ERISA defines other roles such as investment manager, plan administrator, discretionary trustee, and investment advisor as fiduciary roles.

Functional fiduciaries

An individual who is not serving in a “named fiduciary” capacity may nonetheless be a fiduciary by virtue of a functional test embedded in ERISA’s fiduciary definition. Specifically, ERISA provides that a person is a plan fiduciary to the extent he/she:

(i) Exercises any discretionary authority or discretionary control over the management of a plan, or exercises any authority or control over the management or disposition of plan assets;
(ii) Renders investment advice to a plan for a fee, or has any authority or responsibility to do so; or
(iii) Has any discretionary authority or discretionary responsibility over the administration of a plan.

Common fiduciaries

Employer/plan sponsor. Employers who maintain plans, also referred to as plan sponsors, are typically fiduciaries by reason of being named fiduciaries or by acting as a functional fiduciary. In such cases, the employer acts in a dual capacity, as both a fiduciary to the plan and as employer. The Department of Labor (DOL) and the courts have recognized that certain functions of an employer are non-fiduciary in nature, so-called settlor functions, in that such functions are on behalf of the employer, not the plan.

For example, employer decisions include whether to offer a plan in the first place and, if so, what benefits should be offered. On the other hand, once a plan is established, decisions regarding how to execute the intent of the plan—in other words, how to administer the plan—are plan decisions subject to ERISA’s fiduciary standards.

Keep in mind that once the plan is established, settlor decisions and plan decisions can become intertwined. For example, an employer’s decision to no longer offer the plan is a settlor decision, but one that inevitably will lead to a variety of plan decisions (for example, when and how to liquidate plan investments) that must be made in order to carry out the settlor decision to no longer offer the plan.

Corporate officers/board of directors/board of trustees. Corporate officers or members of a board of directors are not necessarily fiduciaries simply as a result of their positions at the company. However, if an office or board member is responsible for selecting the investment options for the employer’s retirement plan or is responsible for the selection of other plan fiduciaries, then that individual is acting as a “functional fiduciary.” The employer’s counsel can help identify which officers or board members may be fiduciaries with respect to the employer’s plan.

Investment manager/adviser. Investment managers are fiduciaries by definition. ERISA defines an “investment manager” as any fiduciary other than a trustee or named fiduciary who:

  • Has the power to manage, acquire, or dispose of any asset of a plan;
  • is one of the following types of entities:
    • (i) certain registered investment advisers (including those advisers registered as such under the Investment Advisers Act of 1940),
    • (ii) certain banks, or
    • (iii) certain insurance companies; and
  • acknowledges his/her fiduciary status, with respect to the plan, in writing.

Even if not an investment manager under this definition, an individual may be a “functional fiduciary” because of his/her authority over plan assets or because he/she renders investment advice to the plan.

Trustee. With limited exceptions, ERISA requires that all assets be held in trust by one or more trustees, or in a custodial account or annuity contract in the case of a 403(b) plan. The trustee has exclusive authority to manage plan assets (which is a fiduciary function), except to the extent that either (1) the trustee is subject to the direction of a named fiduciary who is not a trustee, or (2) authority to manage, acquire, or dispose of assets is delegated to one or more investment managers.

ERISA requires trustees who are subject to the direction of a named fiduciary (commonly known as a “directed trustee”) to follow the proper directions of such fiduciary to the extent that the directions are made in accordance with the terms of the plan and not contrary to ERISA. Although there is no definitive guidance on what constitutes “proper” direction, at least one court has concluded that direction that is clear and unequivocal, in writing, and from a person or entity with authority to provide such direction is “proper” direction.

A directed trustee should follow the proper direction of the appropriate plan fiduciary, but only if the direction is made in accordance with the terms of the plan and not contrary to ERISA.

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Fidelity does not provide legal advice, and the information provided herein is general in nature and should not be considered legal advice. Consult an attorney regarding your plan’s specific legal situation.