Consider a typical retirement plan sponsored by a private employer. The employer is a fiduciary to the plan along with employees who individually serve as trustees or members of the plan’s investment or retirement committee.

The employer may (should!) have concerns about the liability associated with its fiduciary status. Let’s say you are the person asked by the employer to look into this matter.

There are a number of steps you might take to protect plan fiduciaries from liability. One thing you might consider is engaging an investment advisor to act as a co-fiduciary along with the in-house staff responsible for the plan. But let’s say you take another step and engage an “investment manager” to take on “all” responsibility for plan investments. In this case, the hired investment manager actually makes all decisions about plan investment and, as a “discretionary” advisor, only notifies the employer afterwards as to specific investment transactions.

At this point, in-house fiduciaries are exempt from liability for the specific investment decisions made by the investment manager. But are the in-house fiduciaries completely off the hook?

A recent federal district court decision, Perez v. WPN Corp, et al., elaborates on what in-house fiduciaries are required to do in exactly this situation. The court holds that the plan fiduciaries who appoint the investment manager are still responsible for “monitoring” the investment manager’s performance. This duty includes adopting routine monitoring procedures, following those procedures, reviewing the results of the monitoring procedures and, most important, taking any action required to correct any performance deficiencies of the investment manager. So, whether you pick an investment advisor to act as a co-fiduciary or an investment manager to make all the decisions on plan investments, in-house fiduciaries still need to review the conduct of these professionals and take action when necessary.

The Takeaways:

  1. There’s no risk-free way to put your retirement plan on autopilot. Having quality service providers is a good idea but they cannot relieve you, your company or your other in-house fiduciaries from all responsibility for investment and administrative decisions.
  2. Some financial advisory firms charge extra to act as “investment managers.” You may find that the “extra protection” afforded by this arrangement is not really worth the additional expense.
  3. Consider other alternatives to mitigate fiduciary liability. This may include steps like adopting a suitable investment policy statement or obtaining fiduciary insurance. Other possibilities are outlined in “Your Fiduciary Duty – And What to Do About It” that can be viewed here.