ESOP Administrative Responsibilities of Fiduciaries and Non-Fiduciaries As Consultants in the world of ESOPs, we are frequently asked about how one determines who is and who is not a fiduciary of a plan. Fiduciaries of retirement plans are held to a high standard of conduct. The Employee Retirement Income Security Act (ERISA) provides that fiduciaries must discharge their duties:
Any individual who assumes fiduciary responsibilities needs to fully understand his obligations and liability. Just because someone is involved in the day-to-day operation of the retirement plan does not necessarily mean that he is a fiduciary. This article will discuss the roles of fiduciaries and non-fiduciaries alike and the responsibilities that they have for the day-to-day operation of the plan.
The term fiduciary is broadly defined under ERISA to encompass any person or entity that:
The above highlights that to be a fiduciary a person or entity must have the decision-making authority with respect to the plan or its assets. Determining who has this responsibility can often be difficult. Just because the title indicates that they are a fiduciary is not necessarily the determining factor. A person can have fiduciary responsibility for one act but not for another.
A difficult situation arises when a person has to wear two or more hats, one of which is being a fiduciary. In fact, it is quite common for a person to have multiple functions within a company thereby complicating the decision-making process. ERISA clearly allows people to act in multiple roles within the company, including being a fiduciary. However, when a decision involves the retirement plan, the decision as the fiduciary is subject to the standards of conduct discussed above. For instance, the board of directors determines compensation of executives. This affects the value of employer stock. In some instances, the CEO will be a board member and a fiduciary. In these situations, the CEO has to analyze the decision wearing each hat. Retaining ESOP legal counsel and other outside advisors can help demonstrate that the fiduciary obligations have been satisfied. Excusing oneself from the decision involving personal salary is another way to help in addressing the conflict of interest inherent with compensation.
The following discusses persons or entities involved in the administration of an ESOP and their typical fiduciary status:
A: No. Only persons who perform one or more of the functions described in section 3(21)(A) of the Act with respect to an employee benefit plan are fiduciaries. Therefore, a person who performs purely ministerial functions such as the types described above for an employee benefit plan within a framework of policies, interpretations, rules, practices and procedures made by other persons is not a fiduciary because such person does not have discretionary authority or discretionary control respecting management of the plan, does not exercise any authority or control respecting management or disposition of the assets of the plan, and does not render investment advice with respect to any money or other property of the plan and has no authority or responsibility to do so.
Third Party Administrator (TPA) – Generally the TPA does not have decision-making authority over the assets of the plan. The TPA is generally an advisor to the Plan Administrator performing ministerial functions within guidelines established by a fiduciary. Even though the Plan Administrator looks to the TPA for answers regarding the administration of the plan, the contractual agreement between the TPA and the client will generally state that the decision-making authority rests with the client.
Services normally provided by the TPA include:Plan Sponsor – The sponsor can be a fiduciary depending on the function being performed. As stated above, a person or entity can be a fiduciary for one act and not another. Ministerial functions do not give rise to fiduciary decisions depending on who has the authority to make the decision. It is typical that the plan sponsor will retain the authority to select the fiduciaries. This in itself is a fiduciary act. In addition, the plan sponsor will often be named the Plan Administrator under the plan document.
Board of Directors – The Directors are fiduciaries to the extent they have the authority to appoint fiduciaries of the ESOP. A board member may be a fiduciary in one capacity and not a fiduciary in another capacity. Juggling these different roles can be difficult. Retention of ESOP legal counsel to provide guidance is money well spent.
Management – These individuals are not fiduciaries in their role as managers of the company. However, many times management will be the trustee or Plan Administrator who has discretionary authority and therefore is a fiduciary in this role. Again, retention of ESOP legal counsel to provide guidance in making decisions in the different roles played by management is important.
Directed Trustee – Many banks act as a “directed trustee.” A directed trustee is generally a person or entity who has custody of plan assets but is not charged with discretionary authority over the disposition or management of those assets. Court cases have shown that a person can be a fiduciary for one issue but not for another. The determining factor is whether the person has authority over the decisions. Many ESOP companies have retained directed trustees mistakenly thinking they have distanced themselves from the fiduciary responsibility. A “discretionary trustee” can be retained to transfer the fiduciary responsibilities as discussed below.
Discretionary Trustee or Self-Trustee – A “discretionary trustee” assumes the responsibility of decision making and therefore is a fiduciary. Often ESOP companies hire discretionary trustees to transfer this important responsibility and liability. The liability that is associated with being a trustee has discouraged most banks from acting is such a capacity. However, there are still several good institutional trustees who specialize in ESOPs. Their expertise is well utilized when fiduciary decisions are required. In lieu of a discretionary trustee, an in-house person (or persons) may be the trustee. In such a case, they would have the same fiduciary obligations.
Legal Counsel – Legal counsel will generally not be considered a fiduciary. They provide legal advice to the fiduciaries, but decision-making it is ultimately the fiduciaries’ responsibility. Under ERISA, the rendering of professional services normally provided by a professional does not give rise to fiduciary status if that individual does not have control or management over the plan or its assets.
Valuation Firm – Valuation firms are generally not fiduciaries. The ESOP Trustee will retain the valuation firm to provide an independent valuation of the company. In addition, valuation firms provide fairness opinions to the fiduciaries of the ESOP regarding potential transactions. However, the valuation firm is generally acting as an advisor and providing services as part of their profession. The fiduciaries have the responsibility to evaluate the advice received from the valuation firm to determine if it is appropriate.
CPA Firm Auditing the ESOP - An auditing firm that limits the services it provides to a plan to serving only as an independent outside auditor for annual audits, will not be a fiduciary if the firm has no control over plan assets and has not performed in any capacity beyond that of independent outside auditor.
In summary, as has been stated above, that the general measure of whether or not one qualifies as a fiduciary to a plan centers on whether or not that individual has discretionary authority over plan’s administration and/or assets. In some cases, this determination is not easily made so it is strongly recommended that the roles and responsibilities of the individuals involved in your plan be defined and clarified to the greatest extent possible. Often, guidance from outside counsel or other advisors is helpful in this endeavor.
Questions? Get in touch with our team at beysterinfo@rady.ucsd.edu
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