Negotiation the fiduciary delegation minefield

PLANSPONSOR.com

ERISA requires every employee benefit plan to [have] a “named fiduciary.” The named fiduciary—typically a fiduciary committee or board of trustees—is the person or entity that has the ultimate authority to control and manage the operation and administration of the plan.

…ERISA permits named fiduciaries to delegate responsibility for managing plan assets to an investment manager. … Where an investment manager is properly appointed under ERISA, a plan’s named fiduciary will not be liable for the investment manager’s day-to-day management of plan assets, resulting in protection for the named fiduciary. In order to be appointed properly, an investment manager must acknowledge in writing that it is a fiduciary with respect to the plan. The named fiduciary’s only responsibility is to select the investment manager prudently and to monitor the investment manager’s performance periodically to determine whether continuing to retain the investment manager is prudent.

Investment Manager Responsibilities Investment managers have traditionally taken full responsibility for the portfolio of assets they are appointed to manage … . However, as investment managers increasingly have begun to implement more-complex investment strategies, … managers frequently are requesting that named fiduciaries execute ancillary documentation with third-party service providers to facilitate the investment managers’ services.

For example, we recently encountered several instances where an investment manager asked plan fiduciaries to execute a contract with a third-party futures commission merchant to facilitate the investment manager’s use of futures in the portfolio it managed on behalf of the plan. … However, the named fiduciary did not have the expertise to determine whether the terms of the contract were appropriate for the plan or whether the futures commission merchant selected by the investment manager was a good choice … .

When confronted with this kind of situation, named fiduciaries ought to consider whether, by signing ancillary contracts, they potentially are taking on additional liability for the responsibilities they previously delegated to an investment manager. In the previous example, a named fiduciary who signed the contract with the futures commission merchant could later be deemed responsible for the terms of the contract and for the selection of the particular futures commission merchant. …

Strategies for Plan Fiduciaries Several options may be available for named fiduciaries in this situation. Named fiduciaries, … may wish to retain an experienced investment professional to whom they can delegate this authority. In addition, the plan’s directed trustee may have negotiated agreements with providers like futures commission merchants, and may be willing to take direction from the investment manager to execute such agreements on behalf of the plan.

Regardless of the approach selected, named fiduciaries ought to be aware that they may be subjecting themselves to potential liability when they execute ancillary documentation at the request of investment managers.

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Stephen M. Saxon is a Partner with the Washington-based Groom Law Group. Groom is one of the preeminent employee ­benefits firms in the country. Steve and his colleagues have worked on virtually every major legislative and regulatory initiative affecting employee benefits since the enactment of ERISA.