By: HUB’s EB Compliance Team

As an employer sponsoring of an ERISA-covered plan, you are a fiduciary. However, many plan sponsors are uncertain about their fiduciary duties.  This piece is the first in our multi-part series on fiduciary duties and how they relate to health and welfare benefit plans. Future installments will be focused on specific fiduciary duties and how plan sponsors can comply with those duties.

Fiduciary Duties Generally

At a high level, if someone is a fiduciary, that person (or entity) owes a duties to participants and beneficiaries.  Those duties are:

  1. To act solely in the interests of plan participants and beneficiaries. (This is sometimes called the “duty of undivided loyalty.”)
  2. To act for the exclusive purpose of providing them benefits and paying reasonable plan expenses. (This is sometimes called the “exclusive benefit rule.”)
  3. To act with the care, skill, prudence, and diligence under the circumstances that a prudent person acting in that capacity, and familiar with such matters, would. (This is sometimes called the “prudent expert” rule.)
  4. To follow the terms of the plan documents and other instruments governing the plan, as long as they are consistent with the law.
  5. To avoid prohibited transactions.

(There is also an obligation to diversify investments to minimize the risk of large losses, but this typically applies to retirement plans.)

Courts have often noted that these duties are among the highest, if not the very highest, standards of conduct known to the law.  Additionally, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) imposes personal liability on anyone serving in a fiduciary capacity. Thus, being a fiduciary is not something that should be taken lightly.  We will unpack each of these more in future installments.

Naming Fiduciaries

Given the significance of fiduciary status, ERISA requires each plan to provide for “one or more named fiduciaries who jointly and severally shall have authority to control and manage the operation and administration of the plan”. Named fiduciaries are not usually the only fiduciaries, but these are the fiduciaries ultimately responsible for administering the plan for the benefit of plan participants and in accordance with the plan’s written document.

How are fiduciaries named? In the plan document or by following a procedure specified in the plan. Named fiduciaries may be specifically named, as in “Ann Adams is a named fiduciary of the ABC Corp Plan” or they may be named in reference to their title, as in “the Benefits Director is a named fiduciary of the ABC Corp Plan”.  A committee may also be a fiduciary, such as the “ABC Corp Benefits Committee is the named fiduciary of the ABC Corp Plan.”  In that case, each individual serving on the committee is a fiduciary. Naming a fiduciary by reference to a title or committee eliminates the need to update plan documents as the employer experiences turnover.

Alternatively, plan documents may state that the named fiduciary is appointed by the employer or its governing body (like a board of directors).

This is one of the many reasons why having a plan document is extremely important. Without a plan document, there are typically no named fiduciaries. This could result in individuals or groups being treated a fiduciaries who normally would not be. While the named fiduciaries may not be the only fiduciaries (as discussed further below), naming fiduciaries makes it clearer who the employer intends to be a fiduciary. Carrier certificates or TPA booklets typically do not include this information.

Fiduciaries have the authority to control and to manage the operation and administration of the plan. However, fiduciaries do not have to directly administer the plan themselves; they can (and usually do) hire outside service providers to manage the plan. This leads many employers to mistakenly conclude that they are not fiduciaries because they are not handling the day-to-day administration of the plan. However, day-to-day administration may not require fiduciary status. Even if it does, the ultimate fiduciary authority lies with the named fiduciary. The named fiduciary has the ultimate responsibility to oversee the service providers. This oversight responsibility cannot be completely delegated away; it belongs to the named fiduciary regardless of the service providers the named fiduciary hires (even if the service provider accepts fiduciary responsibility). If a fiduciary is not named, that responsibility would typically fall to the employer. This means the officers of the employer would most likely be treated as fiduciaries.

Functional Fiduciaries

Additionally, individuals who are not named fiduciaries may in fact be fiduciaries based on the functions they perform. ERISA specifies the following functions that can make one a fiduciary, whether or not that person is a named fiduciary:

  • Exercising any discretionary authority or discretionary control over the management of the plan or exercising any authority or control over the management or disposition of plan assets; or
  • Having discretionary authority or discretionary responsibility in the administration of the plan.

“Discretionary authority” or “discretionary control” basically mean that the person or entity has the ability to decide.

Here, function and facts determine whether one is a fiduciary. The belief that one is not a fiduciary is irrelevant if fiduciary functions are performed. Similarly, contract language indicating a party is not a fiduciary is ineffective if fiduciary functions are performed. Therefore, even if someone is not a named fiduciary, they can become a fiduciary if they exercise discretion or control over the plan’s administration or its assets.

Note, rendering investment advice for compensation or having any authority or any responsibility to do so also makes one a fiduciary. However, this usually only applies to retirement plans.

Ministerial Functions

Certain functions related to the plan administration are ministerial functions rather than fiduciary functions. These are clerical functions not requiring the exercise of discretion. As a result, persons performing these functions are not fiduciaries.

Examples of this include determining whether an employee meets plan eligibility requirements and calculating benefit deductions. Much of the day-to-day operation of the plan falls under this classification. As a result, payroll employees are typically not fiduciaries. They are not making decisions about who is eligible, but are merely mechanically applying the terms of the plan.

Whether a function is purely ministerial can also turn on the facts and circumstances. If a payroll employee intentionally changes an employee’s deduction, for example, when the plan terms do not allow it, that employee would be considered a fiduciary (and, if violating the plan terms, would be committing a fiduciary breach).

Settlor Functions

ERISA also makes a distinction between so-called “settlor” functions and fiduciary functions. Settlor functions or decisions are not governed by ERISA’s fiduciary rules. The settlor of a plan is the entity that establishes the plan. For example, if ABC Corp establishes the ABC Corp Health and Welfare Benefit Plan, ABC Corp is considered the settlor.

Many plan-related decisions fall under the functions of the settlor, such as: the decision to offer benefits, the decision to offer multiple plan options, the decision to extend eligibility to part-time employees, the decision to raise employee contributions, or virtually any other plan design decision. For different reasons, each of these are business decisions rather than fiduciary decisions. As a result, ABC Corp, in our example, can make settlor-related decisions based on what is best for its business instead of focusing solely on the benefits to participants and beneficiaries.

However, once a settlor decision is made, implementing that decision is often a fiduciary function. For example, if ABC Corp as the settlor decides to offer dental coverage, the next step is selecting the dental carrier, which is a fiduciary function. The settlor is often the initial decision maker for these settlor functions, while the fiduciary is charged with implementing and executing those decisions once they are made.

Conclusion

Being a fiduciary is significant and requires a focus on doing what is best for participants and beneficiaries. We will explore the specific duties that apply to fiduciaries in future posts in this series.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.