“Fiduciary” is a word that is generally used in the company of ominous terms like “responsibility” or “liability.” But is it a word that describes your role, and if so, is that a good thing?
Fiduciaries can be held legally accountable for their actions involving an employee benefit plan. It won’t matter if you are ignorant of the law, its requirements, or even the fact that you are a fiduciary. Advisers should realize that there is a fine line between the non-fiduciary activity of selling investment products and the fiduciary function of rendering investment advice — and crossing that line has serious implications for your business, and you personally.
What Is a Fiduciary?
Any person or entity that has control over the management of an employee benefit plan or its assets is a fiduciary. Also, anyone who offers investment advice regarding plan assets for a fee, or who has the authority or responsibility to do so is considered a fiduciary. Some positions convey an “automatic” responsibility (notably the named fiduciary, trustee or plan administrator), but the law is intentionally broad, and will be applied regardless of official titles. An employee benefit plan must have at least one fiduciary, which is the so-called “named” fiduciary, as well as a plan “administrator” and a trustee.
You can become a fiduciary by playing a controlling role in:
- Determination of search criteria
- Making decisions on the investment package
- Selection of investment options
- Choosing options for mapping
- Monitoring of investment options
- Investment advice to participants
Why Does It Matter To Me?
A fiduciary can be sued for violating, or not performing its duties appropriately. Those penalties can include:
- The Department of Labor (DoL) may assess a civil penalty of 20% of the amount payable pursuant to a court order or settlement agreement with the DoL for a breach of fiduciary duty (or your knowing participation in a violation).
- Willful violation of any reporting or disclosure requirement can be subject to a fine of $5,000, imprisonment for one year, or both (in the case of a person other than an individual, the fine can be as much as $100,000).
- Accepting kickbacks or embezzling funds in connection with an ERISA plan is a federal crime, punishable by a $10,000 fine, five years in prison, or both.
The IRS also has the ability to require that a prohibited transaction be reversed, as well as to impose penalties on individuals that participated in a prohibited transaction. Another plan fiduciary, any plan participant and the Secretary of Labor can bring a lawsuit to establish the liability of an ERISA fiduciary.
As for whose pocket the penalties will “hit,” ERISA notes that in case of a breach of duty, a fiduciary:
- Shall be personally liable to make good losses to the plan
- Shall be personally liable to return any profits resulting from the breach
- May be removed as a fiduciary