Sponsors of Qualified Retirement Plans: Are You a Fiduciary?

If your client sponsors a qualified retirement plan, it’s important to look out for them. Retirement plan law is so detailed and complicated that most retirement plan sponsors have a very limited understanding of their legal obligations. Their ignorance could have very dire consequences with today’s regulations.  It is paramount that your clients understand they are a fiduciary, and this title comes with some very serious legal obligations. Ignorance will be no defense if the Department of Labor (DOL) finds a fiduciary in violation of the law, as recent cases have proved. You need to make sure that your clients understand and can answer the following four questions:

What is a Fiduciary?

In the world of finance, a fiduciary is someone who is legally obligated to act in their client’s best interest. All retirement plan sponsors are fiduciaries. However, they can share their fiduciary responsibility to reduce their liability. There are three different types of fiduciaries described in the Employee Retirement Income Security Act (ERISA), which governs retirement plans, and they all have different duties and liabilities. Named after the sections of the law in which they appear, they are 3(16), 3(21), and 3(38).

3(16) Fiduciary – A 3(16) fiduciary has a responsibility to ensure the plan is created and managed according to ERISA requirements. The plan sponsor takes on this role automatically if they do not hire a Third Party Administrator (TPA). The 3(16) fiduciary typically handles reporting and disclosure requirements, summary plan descriptions, participant disclosures, as well as the plan’s Form 5500 filing.

3(21) Fiduciary – Anyone who manages plan assets or renders investment advice for a fee is considered a 3(21) fiduciary. These fiduciaries do not necessarily reduce liability for a plan sponsor, but they should help the plan sponsor do a better job of running the plan and avoid liability.

3(38) Fiduciary – A 3(38) fiduciary has discretionary control of the plan’s assets and has a legal duty to manage them prudently. This kind of fiduciary must be a bank, an insurance company, or a registered investment adviser (RIA). They select, monitor, and replace investments for the plan.

Is my Broker a Fiduciary?

Often, brokers are not plan fiduciaries. The courts have allowed brokers to classify their actions as marketing as opposed to giving advice in order to avoid taking on fiduciary liability. The difference between salesmanship and a fiduciary role boils down to whether or not the broker has formal and final decision-making power over investments. Brokers do not act in a fiduciary capacity as long as they:[1]

  • Leave all final decisions to the plan’s fiduciary
  • Do not act with discretion
  • Do not take control of plan assets
  • Do not provide individualized investment advice
  • Provide diversified investment options
  • Do not provide specific recommendations regarding the purchase of individual investments

If a broker is not a fiduciary, they cannot be held liable for breach of fiduciary duty. That means that if a plan sponsor gets sued, they cannot pass any of the blame to the broker, even if the litigation is based on the broker’s recommendations or investment package. The plan sponsor must take full responsibility.

What are the Plan Sponsor Fiduciary responsibilities?

No matter how much they delegate, a plan sponsor is never free of fiduciary liability. In choosing service providers to delegate to, they are acting in a fiduciary capacity. The following list contains the responsibilities of a plan sponsor. Some may be shared with other fiduciaries. Plan sponsors are responsible to:

  • Act solely in the interest of the plan participants and their beneficiaries
  • Carry out their duties with the care, skill, prudence, and diligence of a prudent person
  • Get expert advice when needed
  • Evaluate any advice received and make the final decisions
  • Acquire enough information to make informed decisions
  • Follow plan documents
  • Maintain compliance with the Internal Revenue Code
  • Ensure fees paid are reasonable through benchmarking
  • File required forms and documents with the IRS and DOL
  • Offer well-diversified investments
  • Provide investment advice and education to participants
  • Avoid making prohibited transactions
  • Monitor investment performance and make necessary changes
  • Periodically review plan service providers
  • Maintain records
  • Make timely disclosures to participants
  • Keep abreast of changes in laws and requirements
What are the possible consequences?

In 2015, 6,925 lawsuits were filed under ERISA. Claims from only the ten biggest totaled $926.5 million. ERISA violations are serious business. One of the major reasons lawsuits are filed is a breach of fiduciary duty.[2]  People often think that the larger the retirement plan, the greater their liability. However, the DOL treats all retirement plans alike, regardless of their size. Your small business clients have just as big of a target on their backs as the big companies do. Breach of fiduciary duty is just as serious no matter the number of participants in a plan or the amount of assets held. If a plan participant or beneficiary files a claim, the DOL will investigate.

Legal consequences for ERISA violations can be civil or criminal. Civil penalties include things such as fines up to 20% of the plan assets involved in the breach, a requirement to restore plan assets, excise taxes, and paying the expenses of correction. Criminal punishment can include both fines and imprisonment. The Sarbanes-Oxley Act of 2002 allows for individual ERISA violators to be jailed for up to 10 years and pay fines of up to $100,000. Companies can be fined up to $500,000.[3]

With new DOL rules and recent Supreme Court ERISA cases, plaintiff attorneys now have a clear playbook to follow when alleging breach of duty and non-compliance. This may increase lawsuits and makes it more important than ever for plan sponsors to maintain compliance and fulfill their fiduciary duties.

Steps Your Clients Should Take

In order to protect themselves from liability, your clients should:

  • Document all fiduciary decisions
  • Benchmark fees to ensure they are reasonable
  • Ensure documents/forms are filed with the IRS & DOL
  • Make timely disclosures to participants
  • Offer well-diversified investments and evaluate them periodically
What You Can Do to Protect Your Clients

Help protect your clients by ensuring that they understand and are executing their responsibilities as plan sponsors. If they don’t have the knowledge to evaluate an issue, they need to find the necessary resources to comply and make well-informed decisions. Talk to your clients today to make sure they are aware of their legal obligations and the risks of violations. Here are a few items that are helpful to get started:

  • Fund lineup
  • Most recent total plan assets by fund
  • Plan Sponsor Fee Disclosure Report (Form 408(b)2)
  • External TPA fees, if applicable
  • Participant Fee Disclosure Report

Call our office today at (949) 718-1600 or email us at info@bpadvisors.com. We’ll empower your clients to keep them on the right side of ERISA law.


[1] https://www.lrrc.com/Advising-401k-plans-Are-you-acting-as-an-ERISA-Fiduciary-02-28-2013

[2] http://www.benefitspro.com/2016/01/25/top-10-erisa-settlements-of-2015

[3] http://employment.findlaw.com/wages-and-benefits/erisa-violations-penalties-and-punishments-.html

Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.

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