Fiduciary Duties: A Bigger Concern Than Ever?
Two recent court cases bring benefit plan fiduciary duties back into focus. With the risk of large financial liability, class action lawsuits and lots of negative publicity, these cases offer a reminder to keep your fiduciary house in order. ERISA fiduciary duties are among the highest level of care that exists in US law, and carry personal liability. Many employers realize only too late that this is a problem best addressed with preparation and planning. Continue reading for a summary of two new cases, their implications for your business and some important next steps for you and your business.
Santomenno v. Transamerica
Holding: The Ninth Circuit held that when an employer is negotiating for services with a new service provider, the fiduciary duty to pay only a reasonable fee is a fiduciary duty of the employer, not the service provider, even if the service provider will be providing services as a fiduciary. A similar conclusion was reached by the Third, Seventh and Eighth Circuits.
Legal Background: Under ERISA, fiduciaries (which includes employers sponsoring employee benefit plans) have a duty to act reasonably, prudently and in the best interest of plan participants. Part of this fiduciary duty is to pay only reasonable fees for services to the plan. Some of the most common services are investment advice and recordkeeping, which are often bundled together. Carefully reviewing the whole agreement, especially the fees paid, with these (and other) service providers is essential to fulfilling your fiduciary duties.
What this case means to employers: It means that when you start a plan or you switch service providers, employers need to take the time to carefully review and understand the fees (and other provisions of the agreement). Failing to do so could result in a class action lawsuit for breach of fiduciary duty. While it is important to always carefully review agreements for plan services, this case focused on a new, not existing, service provider. This is because once a service provider starts working with the plan they may have a fiduciary duty in future agreement negotiations. It is critical for employers to remember that this is not always the case and will depend on the scope of service and the relationship between the parties. Services providers, even once they are working with a plan, could be performing all non-fiduciary services, leaving the burden on the employer, just as with a new service provider.
1. Determine the scope of your fiduciary duties and how to satisfy them. Even if your plan has been around for years, a regular checkup is a prudent approach. Be sure at a minimum to ask service providers, both at the start of and during the services relationship, if the fee structure being offered is the lowest available to you, based on size, market, products available and other relevant factors.
2. Review your agreements with service providers and if you are unsure about whether they are acceptable, contact legal counsel for a second opinion.
3. Before renewing an agreement or entering into a new one, review it carefully from a fiduciary and legal perspective.
4. Consider providing new or additional training to those who act as fiduciaries to ensure they understand the scope of their responsibilities and how to satisfy them.
Department of Labor (DOL) Fiduciary Duty Rule; U.S. Chamber of Commerce v. DOL
Holding: The long controversial DOL Fiduciary Rule has been vacacted by the United States Fifth Circuit Court of Appeals. The DOL has announced that pending further review, there is no current intention or plan to appeal the court’s decision or enforce the rule.
Legal Background: Several years ago, the DOL published a Final Fiduciary Rule. The rule was designed to protect consumers from those who were often thought to have the consumer’s best interest in mind, but were not acting accordingly. The rule requires that those who handle retirement assets act as a fiduciary, putting the interest of the individuals they are interacting with first. It also required disclosure of compensation and conflicts of interest. Many in the financial services industry were already complying with the rule and applauded efforts to shore up the acts of a few bad actors. Others found it unnecessarily burdensome, beyond the scope of what existing law permitted or required and without real benefit to consumers. The two sides have lobbied heavily and brought suit several times. One of President Trump’s first acts as president was to have the DOL review the rule. The DOL has and was continuing to do so. Prior to the recent decision, the DOL had determined that much of the rule was in the best interest of consumers and should be enforced while suspending certain aspects of the rule for further review.
What this case means for you: Individuals with IRAs or retirement investments will need to exercise increased caution when working with service providers, especially when determining if the advice or products offered create a conflict of interest, whether they are in the individual’s best interest and what fees are associated with the services and investments. As an employer and plan sponsor, this change will have limited impact because ERISA already provided for a high level of fiduciary duties in most circumstances. However, as the first case summarized reminds us, there is a limit to when those fiduciary duties apply.
1. Ask those who advise you what fiduciary duty (if any) they follow.
2. Request a written agreement that specifies they will act in your best interest, discloses conflicts and clearly explains the fees you will pay.
3. If unsure if you are obtaining the best or unbiased advice, seek a second opinion or contact legal counsel that can explain when and how a particular adviser and the agreement they have provided will protect you.
The Learned Concierge - December 2023, Vol. 3
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