Art by Tim BowerADVISER QUESTION: I am a financial adviser who works with
401(k) plan committees. My primary responsibility is to educate them about the
investment process and to give them information about investments. Am I subject
to liability if I learn that a one of these committees is about to commit a
fiduciary breach or engage in a transaction prohibited by the Employee
Retirement Income Security Act [ERISA].
ANSWER: You could be subject to liability. But there are
steps you can take to avoid this result.
For example, if you are an ERISA fiduciary to a particular
committee, because you give it investment advice, you could be liable for
damages resulting from the committee’s fiduciary breach under ERISA’s
co-fiduciary liability rule. According to that rule, the circumstances under
which you would be liable are if you:
- Knowingly participate in the breach;
- Conceal the breach;
- Enable the breach by failing to carry out your own
fiduciary responsibilities; or
- Are aware of the breach and fail to make reasonable
efforts to remedy it.
In other words, you have a duty to act when you know that
another fiduciary commits a breach. That’s because, as a fiduciary, you have a
duty of loyalty to the participants.
What action should you take? There is no one answer; it will
depend on the violation.
The Department of Labor (DOL) in Field Assistance Bulletin
(FAB) 2004-03 said that “reasonable efforts” to remedy a fiduciary breach may
include notifying other plan fiduciaries or the DOL. While this may not be
appropriate in all instances, one thing is certain: You need to take some
action. If you don’t try to remedy the breach, you could be sued along with the
fiduciary who engaged in it, even if it involved responsibilities beyond the
scope of your services.
In one recent case, a court found that a plan fiduciary
responsible for selecting plan investments could be sued for violating his
co-fiduciary responsibilities because he was aware of the plan administrator’s
decision not to pay benefits according to the plan terms and he took no action
to remedy it.
In another case, the fiduciaries of a qualified plan were
taking large loans from it. The loans were prohibited transactions. The DOL
filed a lawsuit, asserting that the fiduciary investment adviser breached his
fiduciary responsibilities by failing to make reasonable efforts to prevent
these transactions and to protect the participants. In an out-of-court
settlement, the advisory firm agreed to restore more than $170,000 to the
pension plans and to provide additional training to its fiduciary investment
Even if you are not a fiduciary, there still is a risk of
For example, the Supreme Court has held that a nonfiduciary
service provider could be sued for participating in a prohibited transaction.
In the lawsuit evoking this ruling, a broker/dealer (B/D) that provided
services to a qualified pension plan purchased interests in certain properties,
at the direction of an unrelated fiduciary, in an arrangement that constituted
a prohibited transaction.
In another case, a court found that a nonfiduciary financial
planner could be sued under ERISA even though he was not a service provider or
other party-in-interest to the plan. Here, the financial planner encouraged his
clients to become participating employers in a multiple employer welfare
benefit plan under which they would contribute toward the payment of premiums under
insurance policies selected by an administrator. The financial planner was
compensated by the administrator out of commissions it received from the
insurance company that issued policies under the plan. The court found that the
financial planner could be sued for knowingly participating in the
administrator’s fiduciary violations.
As these cases suggest, both fiduciary and nonfiduciary
advisers need to have a basic understanding of the fiduciary and prohibited
transaction rules. Then, once an adviser learns of a fiduciary’s breach or of a
prohibited transaction, he needs to determine what steps should be taken to
protect the participants; this may require help from an experienced ERISA
Fred Reish is chair of the Financial Services ERISA practice
at the law firm Dirnker, Biddle & Reath. A nationally recognized expert in
employee benefits law, Reish has written four books and many articles on the
Employee Retirement Income Security Act (ERISA), Internal Revenue Service (IRS)
and Department of Labor (DOL) audits, as well as pension plan disputes. Joan
Neri, who has been associated with the firm since 1988, is counsel on the
Employee Benefits and Executive Compensation Practice Group. Her practice
focuses on all aspects of employee benefits counseling.