What do you do when you witness a 401(k) plan sponsor fiduciary breach? – Carosa

They say the road to “the other place” is paved with good intentions. Usually, this is someone else’s problem. But what happens when that “someone else’s” problem trespasses onto your domain? Do you look the other way? Or will that implicate you? Do you blow the whistle? Or will that get you fired?

Chances are, the typical 401(k) plan sponsor won’t purposely engage in nefarious acts. There may be times, however, when otherwise innocent and perhaps even common sense actions unknowingly cross the fiduciary line (see “How Many Small Business Owners Accidentally Trap Themselves with This Treacherous 401k Fiduciary Conflict?” FiduciaryNews.com, August 13, 2019).

If you’re a service provider,you may be in a better position to see this transgression than the plan sponsor. This makes sense. You have more experience in the fiduciary world of retirement plans. Does this mean that you are under the obligation to say something when you see something?

As you might expect, your answer can depend on which ERISA attorney you ask.

Now, I’m not an ERISA attorney (or even an attorney). I have, however, interviewed plenty of ERISA attorneys, some even on this very scenario. More important, I have served (and continue to serve) in various fiduciary capacities. The answer to this question, therefore, is near and dear to my heart.

This is what I’ve been told:

First, in all cases, if you have any question on a matter of this import, even if you have the slimmest of doubts, speak with a competent ERISA attorney. Don’t take the word of a columnist, even one who shares the same experiences with you. If it’s serious, then you need to address it seriously.

OK, with all this legal disclaimer out of the way, what sort of mileposts might offer some useful guidelines for you?

Start with your specific legal role. You may be a fiduciary to the plan, but that doesn’t mean you are a fiduciary in all aspects of the plan. For example, if your service contract names you as an investment adviser, your fiduciary duties are limited to just that. If the payroll processor or the recordkeeper fails to perform their fiduciary duties, you may not even be aware of it, let alone be held accountable for it.

On the other hand, you might be aware of it. As an honest and upstanding member of the financial profession, you may feel obligated to report what you’ve discovered to the appropriate party (usually the plan sponsor). Mind you, though, this may more likely fall under a moral obligation rather than a fiduciary obligation.

That’s one scenario. It may be the most likely scenario.

But what happens in the case where it’s the plan sponsor who makes a fiduciary faux pas? Who do you report that, too?

Some attorneys will tell you, if your fiduciary role is limited and doesn’t cover the area where the breach occurs, you’re safe. I don’t know. I’m not a lawyer.

But I could see myself in that position as a fiduciary (luckily, this never happened in real life). All I could say is what I’d do. I’d talk to the plan sponsor about it, tell why it may appear to have been an abrogation of fiduciary duty, and suggest the plan’s ERISA counsel might be formally asked for an opinion on it.

If I thought it was an extreme situation, I’d put it all in writing. I don’t want to risk even the appearance of being a party to any potential problem. But that’s just me.

Finally, and here your move is clearest, what happens when you’re a co-fiduciary to the plan? This is where you have an active risk. You are on the hook for all matters pertaining to the plan. If you see the plan sponsor undertake what appears to be a breach, you have an obligation to address the situation immediately. This likely includes formally asking the plan’s ERISA attorney for advice.

And if the plan sponsor refuses?

Then you have no other option but to resign as co-fiduciary.

Remember, the client may not always be right, but he may think he’s right. That’s OK, but it’s no reason to go down with the ship.

After all, it’s somebody else’s ship.

READ MORE:

A 3-word fiduciary rule — Carosa

The ‘Fiduciary Rule’ versus the ‘Rule of Fiduciary’ — Carosa

Do you have the ‘knows’ to be a fiduciary? — Carosa