What exactly is a fiduciary?
In the U.S. legal system, a ‘fiduciary’ describes a relationship between two parties that legally obligates one to act solely in the best interest of the other. The party designated as the fiduciary owes a legal duty to a principal, and strict care must be taken to ensure that no conflict of interest arises between the fiduciary and the principal.
According to a JP Morgan survey, close to 45% of individuals that adopt 401 type retirement plans for their company don’t understand that they are fiduciaries to the plan and are of the false impression they have no personal legal liability. In reality, they hold significant legal liability and can be sued for any form of mismanagement of the plan.
So, just who is a fiduciary?
Anyone who has discretionary control over the company retirement plan’s management, investments, or service. The company who adopts the 401 retirement plan, as well as the person who acts as the trustee, are always classified as fiduciaries – unless they have written agreements with someone to take on those roles (which almost no one wants). Even the company’s third party administrator has hidden language to shift the title of the named plan administrator to the company they are charging fees to. Many company CEO’s are simply not aware of this.
Advanced Pension Programs, Inc. remains one of the very few privately held companies who will take on this type of liability and protect our clients from legal harm. Lawsuits against company plan sponsors and trustees have been rising. If you would like to see examples of recent lawsuits over this, please click here
Department of Labor explains two options to remedy this: ERISA Section 3(21), and 3(38).
ERISA Section 3(21)
Advanced Pension Programs, Inc, serves as a fiduciary as an investment adviser to choose and review the investment selections for the plan. However, the business (i.e. business owner, or trustee) makes the final decisions and thus retains the fiduciary liability for those decisions.
ERISA Section 3(38)
This ERISA Section is very different in that the legal liability shifts entirely to us. Advanced Pension Programs, Inc is delegated the responsibility of making the decisions for the investment selection and review process.
What exactly is a trustee?
Generally speaking, the assets of all 401 retirement plans must be held in a trust account – separate and aside from all company assets – for the sole benefit of the employee participants, and their beneficiaries. Someone or some type of legal entity must act as the trustee of the trust. In addition to making investment decisions for the trust, the trustee also reports the activity of the trust to the third party administer every year – unless these duties have been assigned to someone else. Obviously, the trustee is exposed to enormous legal liability as a result of assuming this role. In addition to acting as a third party administrator on over 400 retirement plans, Advanced Pension Programs, Inc. has served as trustee on over 50 retirement plans. We can also act as a fiduciary under ERISA section 3(38) without being named as fiduciary.
