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by Irvin G. Schorsch, III
As a fiduciary you'd better know the rules or you can face fines with personal liability.
There are over 800,000 such private pension plans governed by the 1974 Act of Congress dubbed ERISA. Historically less than one percent of these plans were audited annually by the regulating agency, the United States Department of Labor. These private pension plans contain nearly $2 trillion. The 750,000 plans covering 100 employees or fewer control over $1 trillion. Today these "small" funds own over twenty percent of the stock of publicly traded companies.
With the significant growth and influence of such funds on the entire investment process, the Department of Labor is stepping up audits and dishing out penalties in increasing numbers.
So what's the problem? Well, the Labor Department is finding fiduciary violations in one of every four plans it reviews. And these violations are made often when well meaning corporate officers simply fail to meet the rules. And violations can result in personal or corporate fines of $5,000 to $100,000. Fines that cannot be escaped even by bankruptcy.
Are You a Fiduciary?
You are if you have any discretionary authority or responsibility in administering the plan or if you provide advice about investments for the plan for a fee directly or indirectly; or if you exercise any discretionary authority or control over the management of an employee benefit plan subject to ERISA.
Generally these tests include trustees of the fund; a plan's officers and directors; members of an investment committee; persons named in the plan documents; people delegated duties, the plan's consultants, advisors, attorneys or even accountants- any of these can be a fiduciary.
Can You Meet The Basic Standard of Conduct Under ERISA?
There are five general standards established by the ERISA Regulations for a fiduciary's duty. A fiduciary must act solely in the interest of participants and beneficiaries of the plan. Are you acting solely to provide a secure retirement for plan participants? Are you acting as the fiduciary in compliance with full disclosure?
The exclusive purpose of the fiduciary must be to provide benefits to the plan participants. This precludes transactions for the benefit of the trustee, parties in interest or other fiduciaries of the plan.
The plan must have a plan document and you must act in accordance with your planned investment objectives. Some of the top investment consultants in the country believe as many as 90% of the smaller ERISA regulated funds do not have a written plan of objectives. As many as 25% of the funds with $10,000,000 or more also have no written plan.
The fiduciary must act "with care, skill, prudence and diligence." The prudent expert rule requires the fiduciary to have the competence of an experienced individual. This requires you to have the capability of a professional investment
advisor.
Finally, the fiduciary must diversify the investments to minimize risk. There is no maximum limitation on one single investment; however, you "should not invest an unreasonably large portion of a plan's portfolio in one investment."
What's the Solution?
The authors of the Employee Retirement Income Security Act, the Enforcement Agency and the courts have strongly encouraged the appointment of an independent investment consultant or financial institution to manage plan assets. As fiduciary, you can prudently delegate this responsibility and reduce your exposure.
Importantly, you must conduct a proper search for the manager ultimately appointed and this manager should acknowledge your risks, limitations and investment preferences to you. This written agreement is critical to protecting your assets and yourself as fiduciary. These rules must be followed scrupulously.
The advisor you name must be a bank, a registered investment advisor, or an insurance company. All of these must further qualify under state laws to manage such funds.
Don't be caught in a fiduciary trap. Get the facts and don't wait for a Department of Labor audit to meet the tests. That's right, ignorance is not bliss!
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