Lately, we are receiving many inquiries relating to ERISA fiduciary considerations. Section 3(21)(A) of ERISA defines a “fiduciary” to a plan as persons who fall into any one of the three categories, whether or not they entered into a formal agreement:
- Investment Discretion: A person who exercises discretionary control over the plan’s assets
- Investment Advice for a Fee: A person receives a direct or indirect fee for investment advice where the advice will serve as the primary basis for the plan’s investment decision.
- Administration: A person has discretionary authority or responsibility of the plan’s administration
For example, if an investment adviser is managing plan assets on a “discretionary” basis, it is a “fiduciary.” If the investment adviser manages assets on a non-discretionary basis, it could still fall within the fiduciary definition, dependent upon the circumstances.
The term “Investment Advice” is what many individuals struggle with when characterizing themselves as fiduciary. Investment Advice is defined broadly as advice to the plan “as to the value of securities or other property, or makes a recommendation as to the advisability of investing in, purchasing, or selling securities or other property.” A mere recommendation as to how to invest plan assets could potentially create a fiduciary relationship if the recommendation serves as the primary basis for the investment decision.
Notably, pursuant to Section 3(38) of ERISA, an investment manager, bank or insurance company may have heightened fiduciary obligations if they acknowledge in writing that it is a 3(38) fiduciary to the plan. Typically plan sponsors often require investment managers to agree to 3(38) fiduciary status because such acknowledgment passes the responsibilities of managing plan assets to the manager. If done properly, the other fiduciaries are relieved of the responsibility for the manager’s investment decisions as long as they have prudently selected the investment manager and continue to monitor its performance. In essence, this means that the standard of care is much higher for the investment manager as virtually all of the fiduciary responsibility is transferred from the named fiduciary to the investment manager.
Whether an investment adviser is a 3(21)(A) or 3(38) fiduciary will be based on facts and circumstances and in particular, the agreement with the plan sponsor. For more information regarding ERISA compliance matters, please contact us at (619)278-0020.