Who's a fiduciary? Featured

9:58am EDT December 20, 2002
Bad securities markets leave retirement plan participants questioning the people in charge. Lawsuits are filed, and employers who are fiduciaries are targets.

Fiduciaries come in two forms: a person who controls the management of a plan or its assets, and a firm that is paid to give investment advice.

Individuals can be fiduciaries for limited purposes and perform other, nonfiduciary duties regarding the same retirement plan. Those who simply follow directions or guidelines are not fiduciaries.

Fiduciaries must be named in the plan's documents so that participants or other interested parties, like the IRS, know who is responsible. An employer can designate itself as a fiduciary, but plan documents should specify a standing committee or the job title of a person who will carry out the fiduciary responsibilities.

Generally, anyone who provides investment advice to employers or plan participants or who selects securities for a fee is considered a fiduciary. Employers that sponsor plans are fiduciaries because they can fire service providers and select investment managers and/or consultants. Administrators who make plan management decisions are also fiduciaries.

When hiring a fiduciary, consider:

* Qualifications with respect to education, credentials, licensing and registrations, and relevant experience

* Compensation issues

* Services

* Frequency of monitoring and reporting performance

* Bonding and professional liability insurance coverage

* The scope of organizational resources

Businesses have the responsibility to review a fiduciary's performance at least annually. Fiduciary duties include:

* Acting in the exclusive interest of plan participants and controlling expenses

* Making decisions that a prudent person familiar with retirement plans would

* Diversifying investments

* Preventing co-fiduciaries from committing breaches, and rectifying the actions of others

* Holding plan assets within U.S. jurisdiction

* Bonding in the amount of 10 percent of funds handled, up to a $500,000 maximum

* Acting according to the terms of plan documents unless the documents are in conflict with ERISA.

* Avoiding prohibited transactions

ERISA permits civil actions to be brought by a participant, beneficiary or other fiduciary against a fiduciary for breach of duty. Fiduciaries are personally liable for any losses to the plan resulting from breach of duty, even if they are unaware of a violation.

Fiduciaries can also be held liable for failing to act in the plan's best interest or failing to take reasonable steps to correct another fiduciary's breach of duty.

Fiduciaries have a great deal of responsibilities, and penalties are severe. Employers must act responsibly when dealing with any retirement plan. Louis P. Stanasolovich, CFP, is CEO and president of Legend Financial Advisors Inc., a fee-only registered investment advisory firm. He can be reached at (412) 625-9210 or at www.legend-financial.com.