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| > Investing > Fiduciary Focus |
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| Delegation for Plan Sponsors (Part 4) |
| by
W. Scott Simon
| 07-02-09 |
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Last month I described in detail how it's possible to insulate the sponsor of a qualified retirement plan such as a 401(k) plan--the "sponsor" actually being represented collectively by real flesh and blood humans who serve as trustees and other named and functional fiduciaries of the plan--from virtually all day-to-day fiduciary investment risk as well as operational/administrative risk to which they would otherwise be subject for sponsoring the plan.
In this month's column, I'll discuss two recent, ongoing lawsuits, one involving a very large publicly traded company and one involving a relatively small law firm, and show how they could have avoided the costs (and needless time and heartbreak) associated with the litigation by simply retaining a professional named independent fiduciary. I'll also explain why very few plan sponsors have never even heard of the kind of significant risk mitigation described in this series--much less understand how they can benefit powerfully from it.
Summary of the Previous Columns in this Series
Before delving into the meat of this month's column, I thought it might be helpful to first summarize briefly the broad powers and duties that may be delegated by plan sponsors under the Employee Retirement Income Security Act of 1974 (ERISA).
A "named fiduciary" under ERISA section 402(a) is typically the board of directors of a plan sponsor. This provision is normally not spelled out in the plan document but is an implied, inherent duty that gives the plan sponsor the power to appoint all other fiduciaries. ERISA section 402(a) is the originating power and authority under ERISA that allows a plan sponsor to choose whether it wishes to retain all or some fiduciary duties, or off-load them to other fiduciaries.
Under ERISA section 402(a), the board of directors of a plan sponsor has the power to delegate limited scope duties to a specialized fiduciary responsible for administration of the plan (ERISA section 3(16)), one responsible for selecting, monitoring and (if necessary) replacing the investment options offered in the plan (ERISA section 3(38)), one responsible for trustee duties defined in the plan (ERISA section 403(a)) or one responsible for a narrowly defined jurisdiction where discretion can be exercised such as the prudence of holding company stock (ERISA section 3(21)). There are a few sophisticated techniques where the board of directors can delegate even the inherent 402(a) responsibility, but that's beyond the scope of this series.
Alternatively, a plan sponsor has the power to "wrap up in a package with a beautiful bow" all the preceding duties and delegate them to a professional full-scope, independent named fiduciary pursuant to ERISA section 3(21). Instead of liability for retaining some (or all) such duties or instead of liability for parceling out some (or all) such duties to specialized fiduciaries on its own, the plan sponsor can simply off-load liability for such duties by delegating them all to a full-scope ERISA section 3(21) fiduciary. No muss, no fuss, for the plan sponsor. The only liability retained by the sponsor in these circumstances is a residual oversight duty.
Upon acceptance of this delegation from a plan sponsor, a full-scope ERISA section 3(21) fiduciary can then turn around and delegate each of the preceding duties to specialized fiduciaries (for purposes of efficiency and risk management). This kind of 3(21) fiduciary has the burden to ensure that the specialized fiduciaries to whom it has delegated these duties are prudent in carrying them out since it is the full-scope 3(21) fiduciary (not the plan sponsor) that will suffer the consequences if they are carried out imprudently. As a result of this, the plan sponsor is insulated from virtually all day-to-day fiduciary investment risk as well as operational/administrative risk.
Braden v. Wal-Mart Stores, Inc.
The first recent, ongoing lawsuit I'd like to discuss is Braden v. Wal-Mart Stores, Inc. which is currently on appeal to the 8th Circuit Court of Appeals. At the time Braden was filed, the Wal-Mart 401(k) plan had more than 1 million participants (purportedly the largest 401(k) plan in the U.S. based on number of participants) who collectively invested over $10 billion in the plan. The plan apparently offered ten investment options: seven mutual funds, a common/collective trust, a stable value fund and Wal-Mart common stock.
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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