Corporate Trusteeship: A Fiduciary Analysis
Tallerman, Sheree R., The CPA Journal
ERISA PROVIDES EXPLICIT EXCULPATORY RELIEF if plan trustees or the plan sponsor delegates investment decisions to a professional investment manager.
CORPORATE TRUSTEESHIP: A FIDUCIARY ANALYSIS
By Sheree A Tale Geller & Wind, Ltd.
The Employee Retirement Income Security Act ("ERISA") requires that plan assets, including 401(k) employee salary deferrals and employer contribulions, be used only to pay benefits to participants and their beneficiaries and to defray reasonable plan operating expenses. Accordingly, qualified plans under ERISA must establish trusts to hold all plan assets. The plan sponsor either manages the plan assets or delegates this responsibility to trustees named in the trust instrument or appointed by the plan sponsor.
A named fiduciary is identified either in the plan instrument or in accord with a plan provision whereby the plan sponsor identifies the fiduciary. Either an individual or an entity may be a named fiduciary or may become a fiduciary based on the actual functions they perform. A named fiduciary commonly achieves fiduciary status by bearing the title, or performing the functions, of a trustee.
Functions giving rise to fiduciary status include exercising any discretionary authority or control over plan management or exercising any authority or control over the investment management or disposition of plan assets. Furthermore, an individual or entity may become a fiduciary by rendering investment advice for a fee.
Administrative managers of the plan sponsor are usually fiduciaries because of their involvement in the daily operation of the plan. Inevitably, they exercise substantial authority and control over final decisions on benefit claims, plan design, plan asset investment, and the selection and retention of plan service providers.
Although ERISA empowers trustees with complete control over plan assets held in trust, trust investment decisions may be delegated to the plan's investment committee, the officers of the plan sponsor, or other designated investment managers. The plan trustee is not liable as a fiduciary for the investment decisions reached by others empowered to make them; rather, those individuals or entities that actually function as investment managers are. Nevertheless, if the agreement with the plan sponsor indicates that the plan trustee selects and manages investments, then the plan trustee will be held to the same liability standards as any other investment manager.
ERISA provides explicit exculpatory relief if plan trustees or the plan sponsor delegates the responsibility for investment decisions to a professional investment manager. No trustee will be held liable for acts or omissions of duly appointed professional investment managers. Nor are plan trustees responsible for the investment and management of plan assets under the control of professional investment managers. Trustees subject to the direction of the named fiduciary are called "directed trustees." Directed trustees will not be held liable for following the instructions of the named fiduciaries or their delegates (i.e., investment managers).
ERISA offers plan fiduciaries, including employer representatives and trustees, significant protection against personal liability for investment decisions if they exercise reasonable care in the selection of an investment manager, provide the manager with a written statement of the fund's investment objectives, and periodically monitor the manager's investment performance.
Plan fiduciaries are personally liable for losses caused by their breaches of any of the fiduciary responsibilities, obligations, or duties imposed by ERISA. Additionally, plan fiduciaries may be liable for breaches of fiduciary responsibility committed by other fiduciaries, including directed trustees.
In most qualified plans, a mutual fund company, insurance company, or stockbroker has actual custody of the plan assets. …