Ways to Limit Fiduciary Liability—Part I

It’s a core mission for financial advisers: work tirelessly to reduce their plan sponsors’ fiduciary liability. But what about their own liability?

The first thing advisers should do is determine their fiduciary role with the plan, says Ary Rosenbaum, principal of the Rosenbaum Law Firm. An attorney who specializes in the Employee Retirement Income Security Act (ERISA), Rosenbaum tells PLANADVISER registered investment advisers (RIAs) have different levels of fiduciary responsibility. “You want to make sure you’re not offering a service that’s not consistent with the agreement with the plan sponsor,” he says.

RIAs can provide 3(21) or 3(38) services, which vary in their fiduciary responsibility. A limited scope ERISA 3(21) fiduciary does not have the same discretionary control as an ERISA 3(38) fiduciary, Rosenbaum says. That control carries more liability. Rosenbaum recommends advisers review their processes and their contractual terms with clients.

Offering less service than is specified is an obvious problem, but so is offering more service, Rosenbaum says. “More service equals more liability, and you’re not charging for it,” he points out. Contractually offering more and delivering less is also bad, because the client may find that out and realize the adviser is violating the terms of the contract.

Have the right insurance, Rosenbaum warns. Advisers should check to see if their liability insurance will cover the expanded role and liability that comes with being an ERISA 3(38) fiduciary. It is common for advisers to find out that their current liability coverage does not cover that role, he says. 

Remember the IPS

Drafting an investment policy statement (IPS) for the plan is critical, according to Rosenbaum. Picking mutual funds is not the most important part of being financial adviser to a retirement plan, he says; it is minimizing your client’s fiduciary responsibility as a plan sponsor. “The first line of defense is helping them develop an IPS."

This statement is designed to guide the plan sponsor as it decides, along with the plan adviser—if the adviser is a 3(38) fiduciary—the investment options to include in the plan, and to evaluate the performance of those investments over time. The IPS should also be shared with plan participants to help them understand why investment options are included or excluded, to provide diversification, reduce risk and keep fees low.

Another thing advisers can do to limit their potential liability is to document everything. “Take notes and minutes for meetings with your clients and detail what was discussed,” Rosenbaum advises. “Document any decisions made about plan investments and the IPS. If you offer investment education to plan participants, always have a sign-in sheet. Keep copies of investment education materials handed out at the meeting and any correspondence that advertised that meeting.”

Rosenbaum points out the adviser’s role is to help the plan sponsor with the fiduciary process. “If you can document that you did your job in a reasonable manner, it’s less likely any court would find you breached your duty to the plan sponsor,” he says. “Good recordkeeping can go a long way in confirming you did a more-than-reasonable job as the plan’s financial adviser.”