What is an ERISA Fiduciary?
(Some content provided by fi360)
The vast majority of the world’s liquid investable wealth is in the hands of investment fiduciaries, and the success or failure of investment fiduciaries can have a material impact on the fiscal health of any country. The timeless principles that underlie the fiduciary standard, such as loyalty and care, provide the basis for trustworthy conduct by those who are entrusted with other peoples’ money. Fiduciary laws and regulations serve to define the details of prudent investment processes. Those prudent processes make adherence to the core fiduciary principles practical and reliable.
Investment fiduciaries can be divided generally into three groups: Investment Steward, Investment Advisor, and Investment Manager.
An Investment Steward is a person who has the legal responsibility for managing investment decisions (e.g., trustees and investment committee members).
An Investment Advisor is a professional who is responsible for providing investment advice and/or managing investment decisions. Investment advisors include wealth managers, financial advisors, trust officers, financial consultants, investment consultants, financial planners, and fiduciary advisers.
An Investment Manager is a professional who has discretion to select specific securities for separate accounts, mutual and exchange traded funds, commingled trusts, and unit trusts.
The primary piece of legislation that governs retirement plans in the United State is the Employee Retirement Income Security Act of 1974, or ERISA. At the end of the day, retirement plan management requires an expertise across a broad spectrum of knowledge areas. Investments, service providers (record keeper, administrator, custodian, investment adviser), ERISA law, Department of Labor law, etc. to name a few. It also requires the fiduciaries have in-depth knowledge of the retirement plan marketplace to justify the plan is providing necessary services for a reasonable cost. The diagram below illustrates how the various laws may govern investment activities depending on the type of portfolio and service being provided.
Investment stewards won’t be expected to be fluent in the various compliance and disclosure regimes that its service providers are subject to. However, it helps to understand where fiduciary conduct standards come from, which laws and rules generally apply to the management of the assets stewards are entrusted to direct, and which service providers are serving in a fiduciary vs. non-fiduciary capacity.
The overlap of fiduciary responsibilities is especially noteworthy when it comes to managing the assets in retirement plans. Professionals registered under banking, securities, or insurance laws often provide advice to retirement accounts, or sell related services or products to qualified plans, which aren’t always subject to a fiduciary standard. Similarly, securities brokers may be deemed fiduciaries for their investment advice under ERISA fiduciary standards for their advice to any retirement account as well as investment fiduciaries under securities law under certain conditions. Investment adviser firms, in contrast, are always subject to a fiduciary duty under the Investment Adviser Act ’40, whether it involves an ERISA plan or individual retail clients. At first glance, then, the need to understand the scope of fiduciary responsibilities may seem daunting, but with the increased regulatory focus on advice vs. arms-length transactions, the laws governing brokers, agents and investment advisers are slowly beginning to merge together under a fiduciary umbrella. The charts below depict the structure of federal oversight of investment fiduciary activities and the typical state structure, respectively.
Recognizing who has fiduciary status under law is not always obvious. It may be stated explicitly in governing documents. It may be a function of the person’s role with a given portfolio or, in the case of professional service providers, how they are registered. Or It can be determined by facts and circumstances. However, being held accountable as a fiduciary is not dependent on the fiduciary being aware of their status. In order to meet their duties, a fiduciary must always be aware of what they are responsible for and which standards apply to their actions.
The overarching responsibilities of investment stewards, coupled with the fact that they are often named fiduciaries in governing documents, leave little doubt as to their fiduciary status. Stewards are entrusted to manage, or assure proper management of, the assets of the investors and beneficiaries that they serve. Whether a trustee, retirement plan investment committee member, a member of a board to a foundation or endowment, or similar role, they are the ultimate fiduciary decision makers. While they can and should delegate specific duties that are better handled by professionals, it is still their responsibility to oversee the fiduciary program, ensure all fiduciary responsibilities are being covered, and to prudently select and monitor their delegated service providers. Unfortunately, as critical a role as stewards play in managing a significant portion of all investable assets in the country, little has been done to prepare them for their significant responsibility compared to other participants in the process. There are few regulatory requirements for minimum competency standards in providing investment oversight and nothing in the way of required advanced education and training or experience. There is also a lack of unified guidance from the courts and legislatures on what constitutes a steward’s investment fiduciary standard of care
Twin Duties of Loyalty and Care
A fiduciary standard generally establishes baseline obligations of loyalty and care to the investor or beneficiary. These fiduciary duties are not nebulous concepts, they are obligations that are well established in common law and translate into practical and often specific requirements to be undertaken by fiduciaries. A fiduciary duty is also a ‘gap filler’ when governing documents, service contracts, or the law is silent on a specific obligation. The fiduciary duty of loyalty, for example, generally requires fiduciaries to avoid conflicts of interest or manage them in the best interest of the investors or beneficiaries. The duty of care requires fiduciaries to “act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” This language is commonly known as the prudent person rule. Fiduciaries should think of this as the prudent “expert” rule because the phrase “acting in a like capacity and familiar with such matters” elevates the obligation to that expected of an expert in the field. When a steward is incapable of meeting that standard, delegation is required. Delegation is addressed with contractual agreements that outline fiduciary duties or appointments.