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Articles from The Business Forum Journal

By Guy Baker

401(k) - Fiduciary Care Defense - Where is this all headed?

As the marketplace begins to understand the importance of fiduciary standards and safeguards, it is obvious there is some confusion about what constitutes due care and what doesn’t. It might be good to first look at who exactly is a fiduciary.

The term fiduciary is defined by ERISA Sec 3(21) as any person who exercises discretionary authority or discretionary control with respect to the management or disposition of assets for a plan. A Fiduciary relationship also exists if this person renders investment advice for a fee or other compensation or if any person has discretionary authority or responsibility for the administration of the plan.

Needless to say, anyone who is a member of the Board of Directors for the sponsoring corporation, a member of the plan committee, the plan administrator and the trustees - these people are all fiduciaries. A fiduciary is expected by ERISA so do more than exercise common sense and good intentions. They must meet a standard.  This standard included care, skill and prudence. The “prudent man” rule is also known as the “prudent expert” standard.

Procedural prudence occurs when the fiduciaries set out a standard of behavior that they agree to follow. This includes monitoring the other fiduciaries because all fiduciaries to the plan are jointly and severally liable.  This penalty, as spelled out by ERISA, includes the exposure through due process of all of the fiduciary’s’ assets. This is a steep price to be paid for failure to comply with these rules.

Fortunately, if the fiduciary can prove procedural prudence, the courts will usually not hold the fiduciary liable for plan losses due to investment performance. It is not reasonable, if the fiduciaries have followed the stated procedures, for them to be personally liable for plan losses. Here are some examples of where the fiduciary might run into problems:

  1. Failure to properly diversify assets. (Particularly a problem when employer stock is included in the plan.)

  2. Failure to provide a method to identify under performing asset classes and then demonstrate an appropriate monitoring criteria of this performance with a satisfactory measure.

  3. Failure to follow the directions of the plan.

  4. Using plan money to directly or indirectly benefit the plan sponsor (This could include having the plan pay 100% of the plan expenses - especially when these expenses are not being properly monitored.)

  5. Failure to write and follow an investment policy statement.

  6. Failure to provide adequate education for the plan participants.

  7. Failure to review plan costs and determine whether the plan is competitive in the marketplace.

  8. Failure to restrict or refuse in-kind contributions.

While there is a certain amount of latitude in these areas, the DOL is looking strictly at the fiduciary’s attention to these issues. ERISA 404(c) offers some comfort in this area, however, in the final analysis, most fiduciaries do not have adequate training in this area.

It would seem imperative today, that fiduciaries retain a consultant who is familiar with these issues and can help them develop a Due Care Defense. To make this selection, there are certain services the plan committee should consider before selecting their Due Care Defense consultant:

Initial Engagement issues

  • Can the consultant provide a method of record keeping that will satisfy the DOL and ERISA rules if the plan is audited?

  • Does the consultant have a procedures process that will comply with the mandated “Procedural Prudence?”

Recurring Issues

  • Can the consultant monitor effectively the performance of all fiduciaries?

This includes preparing an agenda for regular meetings

Meeting with the Fiduciaries at least annually

Review permanent files (usually 5 years of records.)

There are specific steps and procedures the fiduciaries must meet to meet the procedural tests. These include but are not limited to investment selection, monitoring, expense reporting, educational and administrative procedures. The extent to which the plan fiduciaries follow these guidelines and procedures, the higher the probability the fiduciaries will not be subject to legal action or DOL sanctions. The key is to anticipate these issues and prepare an adequate defense.

As is so often the case, the best defense is a good offense. By acting now to insure you are following these guidelines and have successfully implemented the proper procedure, you will likely fall outside the “war on fiduciaries” that is being waged.

About the Author:

Guy is a Fellow of The Business Forum Association.  He is Managing Director of BMI Consulting, a national consulting group with offices in 20 major cities.  He recently founded the Business Success Institute formed to train agents to be fee consultants for business succession planning.  He is also Managing Director of ALIMO a vertical and senior life settlement marketing company headquartered in San Antonio Texas. 

Guy graduated from Claremont McKenna College (BS/Economics-1967) and the University of Southern California (MBA Finance-1968).  Guy earned the Chartered Life Underwriter (CLU) in 1972 and Chartered Financial Consultant in 1981.  He also holds a Master’s degree in Financial Services (MSFS), a Masters in Management (MSM) and an RHU (Registered Health Underwriter).  He is also a Certified Family Wealth Counselor (CRWC).

A frequent writer and speaker, Guy has spoken all over the world.  He has written five books,  including “Why People Buy,” “Investment Alchemy” and “Baker’s Dozen - 13 Principles for Financial Success.”  The BOX™, an easy to understand discussion about the fundamentals of life insurance, has sold over 50,000 copies.   In addition, he has developed an 8 cassette business training album, called “Market Tune-up”, to assist professional agents in their quest to increase sales productivity.

Previous articles by Guy Baker:

Are you at risk as a Fiduciary?
Should I have a Broker
Plan Investment Policy
DOL 401(k) Audits Expenses

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