Prudent Man with a Plan

Most 401(k) reforms before Congress don't address a critical source of risk: fiduciary duty.

“If you give plan information at a gathering of plan participants, you become a de facto fiduciary at that point,” says Steinhour, “whether you’re named one or not.”

As more companies face tough times, experts expect to see a flurry of cases alleging that executives who wear two hats, which is allowed by ERISA, are failing to act for the sole benefit of plan participants. Still, employers believe that such conflicts are rare. “The complete conflict of interest [by an executive wearing two hats] is a worst-case scenario,” says Roxanne Horning, vice president of employee benefits at news giant Gannett Co., which now allows employees to diversify out of previously restricted company stock issued to match employee contributions.

Such conflicts of interest are particularly apt to occur at small and midsize companies, where a senior executive is also likely to be a plan sponsor or sit on the sponsor board, says Robert Rachal, a defense attorney specializing in ERISA benefits and fiduciary claims with the New Orleans office of Shook, Hardy and Bacon LLC. “Executives get to be successful businessmen because they believe in themselves and they believe they can pull a company out of trouble,” he explains. “When companies get into trouble, [wearing two hats] becomes an untenable conflict situation.”

When that point comes, one way to limit a potential breach of fiduciary duties is to appoint an independent fiduciary that takes over entire responsibility for the plan, and over which the senior executives with insider knowledge have no control or oversight at all. But the chances of an executive’s doing that are often slim. “It’s completely counterculture for a senior executive to give up control,” says Rachal. So far, courts have based decisions in this area on which “hat” a fiduciary was wearing when he took specific acts.

Even executives at the highest levels of global organizations can accidentally slip up on fiduciary issues and open their companies up to liability. But a sound fiduciary identification and education effort can go a long way to help all potential fiduciaries steer clear of future problems.

Kris Frieswick is a staff writer at CFO.

Leftover Paternalism

Under ERISA regulations, a fiduciary is relieved of responsibility and liability for any loss resulting from a participant’s self-directed investment decision if the employee can choose from a broad range of investment alternatives (at least three meeting certain verification requirements); give investment instructions to buy or sell with a frequency that is appropriate in light of the market volatility of those investment alternatives; and obtain sufficient information to make informed investment decisions.

Nowhere, however, does ERISA require or even encourage employers to educate their employees about making good decisions. Quite to the contrary, ERISA restrictions on “prohibited transactions,” or those transactions that ERISA prohibits between a party-in-interest and the plan, have created an environment in which employers are highly unlikely to provide real investment advice or meaningful education to employees. Instead, investment education often involves a lecture on how important it is to diversify your assets into a variety of asset classes, and to minimize risk as retirement approaches. Period.

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