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Peeling Back the Fiduciary Layers and Unscrambling the Fiduciary Confusion

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The Participant Fiduciary Adviser -- Participant Level Investment Advice

The Pension Protection Act of 2006 created a new category of fiduciary providing an exemption to the prohibited transaction rules, expanding the universe of those eligible to provide investment advice to plan participants and beneficiaries. The specifics of the investment advice regulations didn't become effective until December 27, 2011.


This category of fiduciary provides individualized participant investment advice that goes beyond general investment education. It provides specific recommendations to a participant for the management of their 401k account. A plan sponsor is provided fiduciary liability protection from the investment advice given to participants and beneficiaries if properly contracted, rules are followed and monitored.

This role has certain limits and is subject to very specific prohibited transaction rules. These rules address the actual and potential conflicts of interest and methods and strategies for making sure that participants are receiving the proper advice in a manner that avoids conflicts. If you support this role, you should be confident that these rules are being followed and you should understand them.

Certain rules must be followed governing the type of advice provided and the method of its delivery.

It is a fiduciary responsibility to ensure that the line between investment education and investment advice is not crossed by an attending advisor, unless the proper structure is in place. Most plan fiduciaries are not aware of this, and permit advisors to cross these lines, thinking it is helpful. Sometimes it is, but such activity can create more liability for the plan fiduciary and as such, permitting this line to be crossed does not justify allowing actions that can potentially involve conflicts in interest and prohibited transactions.

For those having a conflict of interest, the Pension Protection Act of 2006 requires investment advice be delivered under an Eligible Investment Advice Arrangement ("EIAA") by an adviser who must agree in writing to be "acting as a fiduciary of the plan in connection with the provision of the advice." This requirement differs greatly from the general definition of a fiduciary who acts as a fiduciary with respect to the entire plan and not limited to only those assets to which advice is connected.

Some arrangements do not involve the plan fiduciaries.

A plan participant can hire an advisor to manage their 401k account outside of any other relationship to the plan. What the plan sponsor must be sure to understand is whether the advisor, picked by the participant, becomes a fiduciary to the plan. This relates to whether or not the participant has given the advisor discretionary control over the participants account. A plan sponsor has no obligation to the participant to provide any guidance or assessment of the advisors services, engaging in this type of relationship. A plan sponsor is best to avoid any involvement in the arrangement including the authorization for such services to be paid out of the participants account. Maintaining a "Chinese wall" between the plan and this type of arrangement maintains the plan sponsors liability protection from the advice provided to the participant.

So what does this all mean for the plan sponsor and officials? It is critically important to understand:

  • Who fulfills the educational role and does any of the 401k investment discussions go beyond education with any individual participant?
  • Who has direct management access over the participant accounts and are there other unintended fiduciaries?
  • If individual advice is being given, does it comply with the requirements and avoid conflict and prohibited transactions?
  • What fiduciary protection is given by any individual advice model?
  • Are you exposed and do not intend to be?

It is important for the plan official and fiduciaries to carefully select and determine the role for individual advice and select the right provider who can offer real protection.

Limitations, Self-Direction and Monitoring

As stated above, the role and responsibility of the fiduciary is not mandated to be an all or nothing proposition. Thus, there are limits on the fiduciary role that must be managed and evaluated. The first limit is that certain sponsor related functions are not fiduciary functions. The right and responsibility to implement, amend or alter, terminate or merge a plan, is not a fiduciary function, these are called "Settlors Acts." They are considered business decisions of the plan sponsor. Plan officials should be aware of this distinction, but the details of this distinction are beyond the scope of this article. It is best for the plan officials to align themselves with a service provider, or counsel, to ensure that the lines between sponsor function and fiduciary function are understood and properly managed.

Additionally, in a plan where employees self-direct their investments, the specific construct of the individual participant portfolios and the participant's investment results are not subject to the fiduciary rules, as long as the requirements of ERISA Section 404(c) are followed. These specifics are beyond the scope of this article, but suffice it to say that the participant is not a fiduciary when the participant makes investment decisions.

Finally, most fiduciary roles that involve the appointment or allocation of responsibility to other fiduciaries require that the appointing fiduciary periodically monitor the appointed fiduciary conduct. This monitoring responsibility is part of the fiduciary role and is a critical component to ensuring that the fiduciary functions are being undertaken reasonably and properly. Plan officials can never shed 100% of their fiduciary responsibility or the potential for personal liability. It should, however, be properly established and managed.

This monitoring obligation supplies another reason to have the right structure and select the right fiduciaries and service providers for the plan, to reduce and limit not only the responsibility and role, but also your risk.


The fiduciary role and responsibility is the most important and comes with it the most substantial liability.

The fiduciary lines of authority can be difficult to draw. As we have pointed out in this article, there are multiple roles and multiple types of fiduciary roles with respect to each retirement plan. Identifying and contracting with the right service providers, understanding and knowing in great detail the roles and responsibilities and liabilities, and how to manage those roles, will provide a better functioning plan with reduced overall liability and exposure to plan officials and companies that sponsor these plans.

In this regard, plan officials should be able to ask and answer a number of important questions at the blink of an eye, such as:

  • Who is the Named Fiduciary with respect to our plan and could it be individuals with personal risk?
  • Do we have a Trustee and if so, what are the limits of that role?
  • Who are the other fiduciaries providing services to the plan and is their role and responsibility well aligned with ours?
  • Are our service providers equipped to evaluate and understand the continuous change that faces our plan and arrangements?
  • Are our fiduciaries subject to any conflicts of interest and if so, are they appropriate fiduciaries for us to retain?
  • Are our fiduciary roles and responsibilities described and detailed in writing?

Evaluating and answering these important questions will permit the plan officials and sponsor representatives to avoid direct attribution of risk and liability, and result in a safer plan that better serves the participant and beneficiary contingencies.

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A PDF of the full white paper is available here.


Find more on this topic here: Fiduciary Responsibility and Liability Issues.

The information provided here is intended to help you understand the general issue and does not constitute tax, investment or legal advice. Use of any information from this article is voluntary, and reliance on it should only be undertaken after an independent review of its accuracy, completeness, efficacy, and timeliness.

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