After reading the agreements, you may be surprised by which, if any of your service providers, acknowledges having fiduciary responsibility to your plan.

The issue of "functional fiduciary" is where it gets trickier. While assuming that others have fiduciary liability, and in fulfilling your duty to your company's employees, you may inadvertently enter into the role of a "functional fiduciary." This may happen instantly through something as innocent as a suggestion to an employee about their investment options.

And when you become a "functional fiduciary," you have personal liability, which means there is no "corporate veil" to protect you from being personally sued if something goes wrong with the plan and your personal assets could be at risk. Recent case law found that individual plan participants can sue plan sponsors for breach of fiduciary obligations. As a result, attorneys are getting more aggressive in identifying and pursuing these types of cases.

If you perform any of the following functions, you may have "functional fiduciary" functional fiduciary liability:

• Advising a participant on how to invest
• Selecting a service provider or product for the plan
• Deciding when to add, drop or revise investment options
• Making the final decision after a broker's recommendation 

If you know or discover that you are in a position of fiduciary responsibility, you should consider doing the following to protect yourself while fulfilling your obligation to the plan and the employees of your company:

• Follow the plan document – Get to know all of the details in your plan document. Focus on issues like whether or not bonuses are included in the definition of "compensation" for purposes of employee contributions and matching contributions. Find out how forfeitures and breaks in service should be handled.
• Ensure that investment options are diversified – You have an obligation to diversify the plan's investment options in order to minimize the "risk of large losses."  Further, if the plan's investments are participant directed, a minimum of three investment options with different potential risks / rewards must be available.
• Avoid prohibited transactions – Prohibited transactions are those between the plan and a party-in-interest that involve self-dealing or a conflict of interest. Paying more than "reasonable compensation" for services is one example. Exemptions are available for transactions that are necessary, furnished under a reasonable contract, and involved no more than reasonable compensation.
• Encourage communication – Encourage the registered investment advisor who works with your plan to regularly come into the office and make themselves available to employees. This will provide employees with a source of information and experts for their questions.
• Prudently carry out your duties - This is easy. Just follow the "prudent man rule," which says that you should carry out your duties to the plan with the same "care, skill, diligence, and prudence that a prudent man would use."

Other things to consider when looking to manage fiduciary risk are:

• Establish and maintain a prudent process for operating the plan
• Adopt an investment policy statement and follow it
• Engage experts when necessary
• Evaluate and monitor all fees and expenses being paid by the plan
• Document all steps you take to fulfill your fiduciary liability.

The risk associated with fiduciary liability can be scary but you can reduce that risk. Educating yourself and other plan fiduciaries is an important first step in meeting your obligation. 

To learn more about this topic or other issues related to employee benefit plans, please contact Scott Goodwin at Wolf & Company at [email protected] or 617-428-5407.