Ethics and Co- Fiduciary Liability with 3(16) Services and Their Implications

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1 Ethics and Co- Fiduciary Liability with 3(16) Services and Their Implications Ilene H. Ferenczy, Esq., CPC Ferenczy Benefits Law Center LLP 1

2 Agenda What Is a 3(16) Administrator Really? Decisions, Decisions And Ethical Implications Splitting the Duties Liability Protections What Is a 3(16) Administrator Really? ERISA 3(16) says: The term administrator means (i) the person specifically designated by the terms of the instrument under which the plan is operated; (ii) if an administrator is not so designated, the plan sponsor. 2

3 What Is a 3(16) Administrator Really? ERISA 402 says: Every employee benefit plan shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan. Every plan shall have a procedure for allocating responsibilities for the operation and administration of the plan. What Is a 3(16) Administrator Really? ERISA 405(c)(1) says: A plan may expressly provide for procedures for allocating fiduciary responsibilities among named fiduciaries and for named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities under the plan. 3

4 What Is a 3(16) Administrator Really? ERISA 405(c)(2) says: If a plan expressly provides for a procedure to allocate responsibility, the named fiduciary is not liable for a failure by the designee except to the extent the delegation, the procedure for delegation, or the continued delegation were done in a manner that violated the named fiduciary s duties. What Is a 3(16) Administrator Really? Therefore, a 3(16) Administrator is appointed by a named fiduciary to take on certain fiduciary responsibilities under the plan 4

5 What Are the 3(16) Responsibilities? If search ERISA and the DOL regs, the following are the responsibilities that arise: Furnishing the SPD and SMMs to participants Notifying DB Ps of fundingbased distribution limitations Hiring actuary, qualified public accountant Filing Forms 5500 Providing 204(h) notices to Ps Administering QDROs Providing QACA notices to Ps Providing DB annual funding notices, DC SARs Providing participants with blackout notices Notifying DOL/Ps re transfer of excess pension assets to health benefit accounts Providing Ps with notice of right to divest from ER securities Acting as agent for service of legal process for the plan Notifying Ps of change in investment options Dealing with the PBGC in re DB plan terminations Advising PBGC of reportable events Maintaining plan records Suing on behalf of the plan Responding to P requests What Are the 3(16) Responsibilities? If search Code and the Treasury regs, the following are the responsibilities that arise: Administering QDROs Providing 402(f) notices to participants Filing actuarial report with IRS Filing Forms 5500 Doing mandatory rollovers Withholding taxes from distributions Filing Forms 1099R 5

6 What Are the 3(16) Responsibilities? Most informational source for responsibilities is the Plan Document Interpret plan provisions and resolve ambiguities Determine eligibility for participation/receive benefits Authorize discretionary disbursements Determine liquidity needs and coordinate with trustee Furnish disclosure information to participants Determine answers to admin-related questions Establish rules and procedures Handle claims Determine amounts of benefits Maintain records Enter into contracts for the plan Provide notices to participants Act as named fiduciary Correct defects Assist participants Determine QDRO validity Appoint other advisors What Are the Responsibilities of a Hired 3(16) Administrator? Determined contractually through delegation document: so, you decide what you will and will not handle 6

7 Decisions, Decisions and Ethical Implications Should the 3(16) Administrator Be Designated in the Plan Document? The plan document will outline the Plan Administrator s responsibilities If the 3(16) administrator cannot or does not want to do them all, then the Plan Administrator responsibilities must be shared Question: who will delegate to whom? 7

8 Why Not Be Designated in the Plan Document? You are the one responsible for doing the delegating: Do you want to judge whether the plan sponsor is a prudent delegate for the duties that it retains? If you quit, how will the plan document be amended to remove you and will it? If Not in the Plan Where? Need a delegation document: direction from the Plan Administrator to the 3(16) delegate as to the duties being assigned Can double as services agreement if it contains language of delegation 8

9 What Duties Can You Do? There are ethical and legal limitations on what you can do in this arena, and you should know about them ERISA Obligations ERISA requires a fiduciary to act prudently Can you prudently take on a given task? 9

10 Circular requires best practices: Tax advisors should provide clients with the highest quality representation concerning Federal tax issues by adhering to best practices Circular requires competence: A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged 10

11 Circular requires that the company owner/ manager ensure company-wide competence: An individual who has principal authority in the firm must take reasonable steps to ensure that the firm has adequate procedures to comply with Circular 230 obligations ASPPA Ethics Require You to Do Good Work Professional Integrity: A Member shall perform Professional Services, and shall take reasonable steps to ensure that Professional Services rendered under the Member s supervision are performed, with honesty, integrity, skill and care. 11

12 ASPPA Ethics Require You to Do Good Work Qualifications A Member shall render opinions or advice, or perform Professional Services, only when qualified to do so based on education, training and experience. What Duties Should You Do? Where can you do a good job? Where can you be of help to your client? Where can you make money? 12

13 Splitting the Duties Philosophical Question Do you want to: Just outline your legal responsibilities? Help the client know what responsibilities it has retained? Is it an ethical violation if you don t do the latter? Is it a fiduciary breach? 13

14 Co-Fiduciary Liability You are liable for a breach of duty by another fiduciary if: You participate knowingly in, or knowingly undertake to control, the breach You facilitate the breach by not fulfilling your responsibilities under ERISA You know about the breach and you do not make reasonable efforts to remedy the breach Co-Fiduciary Liability You are hired by the plan sponsor who has primary responsibility for the plan But, you are in a superior position to know what is required of the plan sponsor under the plan and ERISA If you don t help educate the plan sponsor about what it needs to do, are you liable as a co-fiduciary? 14

15 Alternative Should you at least disclaim liability for the plan sponsor s lack of understanding of its own responsibility? If you do, will that protect you from legal responsibility? Another Thing to Consider If you do try to advise the client of its fiduciary responsibilities what if you forget something? Have you now made the client s problem your problem? 15

16 If You Become Aware of a Breach By Your Client Can you: Ignore? Advise client to correct the breach and do nothing further? Advise client to correct the breach and then quit? If You Become Aware of a Breach By Your Client Liability risk: A fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary 16

17 Liability Protections Exculpatory Clauses A fiduciary under ERISA cannot have a contractual provision that purports to relieve the fiduciary from responsibility or liability for any responsibility, obligation, or duty under ERISA 17

18 So How Can You Reduce Liability? 1. Don t take on what you don t want to or can t do There should be a written document that outlines what you are responsible for Delegation document Service contract Plan document The document should disclaim responsibilities that are not specifically listed in the delegation So How Can You Reduce Liability? 2. Help the plan remain safe by advising the client of its responsibilities Clients don t know what they don t know, and if something goes wrong, the client will likely blame you Litigation is expensive whether or not you win Having an unhappy client causes you stress Having an unhappy client can harm your reputation You may be able to avoid all this by being proactive from the beginning 18

19 So How Can You Reduce Liability? 3. Be properly insured Be sure your E&O insurance covers you for fiduciary breaches Make sure you are properly bonded Make sure that, if something happens for which you might be liable, you follow the requirements in your insurance contracts for reporting the issue and maintaining coverage So How Can You Reduce Liability? 4. Have good procedures (don t take this lightly) Are you doing anything differently internally with regard to your clients for whom you are acting as a fiduciary? If not, why not, when you are taking on additional responsibility and liability? Do your employees appreciate the added responsibility? (Do they know which clients are 3(16) clients?) 19

20 So How Can You Reduce Liability? 5. Don t have anyone in your office doing 3(16) work who is not qualified Remember, you must act prudently in performing your work These cases should not be the learning ground for new administrative staff Is it prudent for this person to be handling 3(16) duties? Your ethical standards require you to engage in Best Practices and to properly supervise Questions? 20

21 Contact Information Ilene H. Ferenczy Ferenczy Benefits Law Center LLP 2200 Century Parkway, Suite 560 Atlanta, Georgia (678) (V) (866) (toll free) (404) (F) Follow us on 21