Independent Fiduciaries Do Not Eliminate Liability

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Thu, Jun 03, 2010
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We have often discussed the corporate governance conflicts that occur when the same person wears multiple hats (e.g. Seller, Board member, Trustee, etc.). One solution to reduce the conflicts is to engage an independent fiduciary.

Outsourcing Does Not Make a Fiduciary Bullet Proof discusses how it is not reasonable to expect that the delegation of fiduciary responsibilities to an independent fiduciary will completely insulate the named fiduciaries from liability. It discusses how ERISA Section 405(c) provides guidance on how naming a third party fiduciary does and does not relief for the named fiduciaries:

The truth is that a plan's in-house or named fiduciaries cannot avoid fiduciary responsibility and potential liability under ERISA simply by retaining a third party to manage plan investments or other fiduciary functions, regardless of the terms of its agreement with the third party. Delegating fiduciary responsibility and deciding whether to continue an existing delegation are themselves fiduciary functions subject to ERISA. Not only does this mean that a named fiduciary must satisfy ERISA's prudence and exclusive benefit requirements when it delegates its fiduciary responsibilities to third parties— it also means that the named fiduciary is responsible for oversight of the third party delegatee's performance. A named fiduciary's failure to monitor a third party delegatee's performance and, if appropriate, terminate the delegation, is a breach of its fiduciary responsibilities and could result in co-fiduciary liability for enabling a fiduciary breach or for failing to try to remedy such a breach when the named fiduciary knew or should have known that a breach had occurred.

Here is the text of ERISA Section 405(c) - Liability for breach of co-fiduciary - Allocation of fiduciary responsibility; designated persons to carry out fiduciary responsibilities:

(1) The instrument under which a plan is maintained may expressly provide for procedures (A) for allocating fiduciary responsibilities (other than trustee responsibilities) among named fiduciaries, and (B) for named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities (other than trustee responsibilities) under the plan.

(2) If a plan expressly provides for a procedure described in paragraph (1), and pursuant to such procedure any fiduciary responsibility of a named fiduciary is allocated to any person, or a person is designated to carry out any such responsibility, then such named fiduciary shall not be liable for an act or omission of such person in carrying out such responsibility except to the extent that--

(A) the named fiduciary violated section 1104(a)(1) of this title--

(i) with respect to such allocation or designation,

(ii) with respect to the establishment or implementation of the procedure under paragraph (1), or

(iii) in continuing the allocation or designation; or

(B) the named fiduciary would otherwise be liable in accordance with subsection (a) of this section.

(3) For purposes of this subsection, the term ``trustee responsibility'' means any responsibility provided in the plan's trust instrument (if any) to manage or control the assets of the plan, other than a power under the trust instrument of a named fiduciary to appoint an investment manager in accordance with section 1102(c)(3) of this title.

Topics: Compliance, ESOP Corporate Governance

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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