Sunday, November 28, 2010

Liability Driven?

Having recently had a couple of new members join our 401(k) investment committee, I asked our investment adviser to conduct a briefing so that the new members – and those already serving on the committee – would have a better understanding of the responsibilities of being on that committee.

Most of that session focused on what was expected of them: the requirement to act solely in the interests of plan participants and beneficiaries, the importance of process (and documenting that process), and the implications of the prudent expert rule.

However, aside from the obvious motivations in helping my co-fiduciaries know what was expected of them1, at the conclusion of our session, I tried to summarize for our committee three things I think every investment committee member should know—and that, IMHO, kept top of mind, serve to keep an appropriate focus on those responsibilities:

You are an ERISA fiduciary.

Even as a small and relatively silent member of the committee, you direct and influence retirement plan money. I’m not saying that some crafty attorney couldn’t cobble together some kind of legal or practice exclusion that would technically suffice to erect some kind of legal shield—but I suspect that even that would be readily penetrated by a court2.


As an ERISA fiduciary, your liability is personal.

You may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Now, you can obtain insurance to protect against that personal liability—but that’s probably not the fiduciary liability insurance you may already have in place, or the fidelity bond that is often carried to protect the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. If you’re not sure what you have, find out. Today.

You are responsible for the actions of other plan fiduciaries.

All fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, it’s a good idea to know who your co-fiduciaries are—and to keep an eye on what they do, and are permitted to do.


—Nevin E. Adams, JD

1 As an ERISA fiduciary, you are expected to act SOLELY in the interests of plan participants and their beneficiaries, and with the exclusive purpose of providing benefits to them; to carry out those duties prudently (and by prudent, it is intended that you be a prudent expert); to follow the terms of the plan documents (unless inconsistent with ERISA); to diversifying plan investments (specifically with an eye toward minimizing the risk of large investment losses to the plan); and to ensure that the plan pays only reasonable plan expenses for the services it engages.

A couple of points of clarification: IMHO you can’t follow the terms of the plan documents if you haven’t read them, nor can you ensure that the plan pays only reasonable expenses if you don’t know what the plan is paying, or for what.

2 IMHO, “you don’t have to be a fiduciary to be on the investment committee” should be added to the list of great lies—like “the check is in the mail….”

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