Plan fiduciaries are held to the highest performance standards
and can be personally liable for breaches of fiduciary
responsibility. Because of this potential liability, there should
be clear and rational rules enabling those who provide services to
plans to know when they have crossed the line.
I recently wrote a post called the "
Teflon Fiduciary" in which I argued that the U.S. Court of
Appeals for the Fifth Circuit had permitted investment advisers
functioning as fiduciaries to avoid responsibility for imprudent or
inappropriate advice. By looking to the manner in which the adviser
in question was paid rather than whether he was functioning as a
fiduciary, that court set the line in the wrong place. The rule may
have been clear, but it wasn't rational and it excluded too
We have now had a decision from a federal district court in
another part of the country that seems to err in the opposite
direction by including as fiduciaries people who the drafters of
ERISA probably never intended to cover.
Mass Mutual marketed 401(k) investment and recordkeeping
services to two 401(k) plans sponsored by Golden Star, and
plaintiffs challenged (among other practices) Mass Mutual's
receipt of revenue sharing payments from investment providers in
connection with plan investments. The ERISA self-dealing provision,
that plaintiffs claimed, had been violated applied only to
fiduciaries. Their claims would fail if Mass Mutual was not a
In a recent ruling denying summary judgment to Mass Mutual, the
court found that Mass Mutual was a "functional fiduciary"
because it had the discretion to unilaterally set fees up to a
maximum and it actually exercised that discretion. Specifically,
Mass Mutual determined its own compensation, took fees out of
separate accounts, and had discretion to offset some or all of the
revenue sharing payments against management fees. The same decision
rejected plaintiffs' claims that Mass Mutual was also a
fiduciary because it had contractual authority to add, delete or
substitute mutual funds available on the plan menu-and therefore
influence the amount of revenue sharing it was paid- because Mass
Mutual had never exercised its authority to change funds on the
menu during the limitations period. This is consistent with the
position taken by most courts that have addressed this issue. (See,
e.g., Leimkuehler v. Am. United Life Ins. Co., 713 F. 3d
905 (7th Cir. 2013))
In its amicus briefs filed in other recent cases, the Department
of Labor has asserted the same positions taken by plaintiffs in
Golden Star, but is this a rational and clear basis for determining
fiduciary status? It would appear to be more logical to find that
the person must first be determined to be a fiduciary based on
other actions it took with respect to the plan, and then examine
whether a breach of fiduciary duty occurred in setting the level of
If setting its own compensation level is what makes a vendor a
fiduciary, then almost any plan record-keeper could be held to be a
fiduciary under the reasoning adopted by the Golden Star court
because most form contracts we see permit plan vendors to change at
least some rates for service, by simply providing advance notice.
However, under longstanding ERISA authority, Reg. 2509.75-8 on
fiduciary responsibility provides in Q&A D-2 that those who
maintain plan records and prepare plan reports "who have no
power to make any decisions as to plan policy, interpretations,
practices or procedures" are not
These recent decisions make a clear case for establishing more
consistent standards so that plan service providers know in advance
whether they have fiduciary responsibilities and exposure.
Amidst much controversy, the Department of Labor is undertaking
to update its 1975 regulations on the definition of
"fiduciary." We don't know when we will see a new
proposal or what it will say. However, if the new proposal does not
establish rational distinctions that help prevent service providers
from inadvertently assuming fiduciary status, perhaps it is time
for Congress to revisit this issue, as the court cases in this area
don't seem to be advancing that goal.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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