Sliding into Fiduciary Obligations: The Pitfalls of Going Above and Beyond

One of the more significant changes contemplated in the ERISA and DOL regulations is the modernization of the definition of fiduciary.

Anyone can serve as a fiduciary under ERISA Section 3(21) as long as the person meets or performs specific functions, including control over the management of the retirement plan or the disposition of its assets, rendering advice for a fee, or having any discretionary responsibility for the plan.

It’s a functional definition. The function an advisor performs in connection with a retirement plan determines whether they may be deemed a fiduciary. However, the functional nature of the definition could be problematic, especially for solicitors.

Solicitors can be extremely helpful in facilitating the relationship between the plan and the investment manager and administrator, conducting ongoing employee education and providing information on different investment strategies.

The advisor’s actions in fulfilling his or her role as a solicitor may cause him or her to assume fiduciary responsibilities. If, for example, the solicitor advises a plan sponsor on which funds to include in the plan, they may be rightfully considered a fiduciary.

Once they’ve slid into the role as a fiduciary, there is no going back.

Fiduciaries have a heightened responsibility and scrutiny of conduct. They must act in the best interest of the client, the plan, its participants and its beneficiaries. In practice, this means, among other things:

  • avoiding conflicts of interest whenever possible and thoroughly disclosing them when unavoidable
  • discerning between waivable and non-waivable conflicts
  • operating transparently and with full disclosure of all matters of material importance to the client and updating those disclosures when necessary, especially as to matters of compensation, both direct and indirect
  • avoiding ERISA prohibited transactions, the most troubling species of nonwaivable conflicts
  • being aware of the conduct of co-fiduciaries and taking action to prevent activity when it lapses into misconduct
  • understanding that whistle-blowers are legally incented to come forward when fiduciaries are not operating with these values in mind.

Advisors should remain cognizant of their role at all times and determine what actions may constitute their becoming a fiduciary.

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