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Insurer defaults on annuities, GICs bring wave of employee litigation and Department of Labor investigations
Companies that tried to reduce their liability for benefit plan performance by switching from defined benefit plans to defined contribution plan are being rudely awakened by the monster that will not die. Fiduciary liability, they are finding, is no less worrisome that it was under the old plan.
Through sponsors of defined contributions plans no longer responsible for guaranteeing a specific return to retirees, the obligation to provide prudent and diversified investment choices has grown. Fiduciary responsibility, defined by the Employee Retirement Income Security Act, applies equally to defined benefit and defined contribution plans, and treasury managers are learning the hard way that assigning responsibility for plan activities to outside specialists still does not relieve them of fiduciary liability.
Who has to worry about fiduciary liability?
According to ERISA, a fiduciary is any person who
* Exercises discretionary authority or control with respect to the management of the plan or management or disposition of its assets.
* Provides investment advice for a fee.
* Has discretionary responsibility in the administration of the plan.
Under this definition, which is still being refined and applied by the courts and regulatory agencies, fiduciary liability reaches far beyond the plan administrator, trustees and investment managers. It may include a variety of employees, not necessarily officers, whose jobs put them in a position to influence or carry out pension decisions.
A member of an investment committee who helps to choose investment managers for the plan would be a fiduciary. A controlling shareholder could be a fiduciary, responsible for the conduct of other fiduciaries. Outside the company, insurance agents, stockbrokers and accountants might be included, along with investment managers.
Clerks carrying out explicit instructions are not considered fiduciaries, but if they interpret plan instructions and make judgments (like authorizing or disallowing disputed benefit payments), they may be deemed fiduciaries.
In one case, a company's bookkeeper was found to be a fiduciary of the company's retirement plan because he disbursed its assets. When asked by company executives to let the company borrow plan funds, he did so. He was later held liable for a plan shortfall and ordered to make up the difference from his personal funds.
"If a plan fiduciary delegates his fiduciary duties to others, he releases himself of nothing but detail," says …