Fiduciary Liability for signing Form 5500

One of the newest marketing techniques I am running into is where an "independent expert" come in and says to the firm's controller that by signing Form 5500 for the firm you are exposing yourself to a personal liability, including making yourself a fiduciary.  I note that the Plan document does include language that fully indemnifies any individual acting as an agent for it, the Plan Sponsor.  Anyone have any comments on this practice?

Let me guess, they are willing to take on that "liability" for a fee?

But of course!  After the Client signs some big service agreement with lots of fine print.

I haven't seen this pitch on its own, but I have seen it as part of the "we take on all fiduciary liability" marketing.  

I've seen this.  The "counter" is to point out that in all likelihood, the person signing the 5500 is a fiduciary anyway, by virtue of function, and then to educate them on being a "good fiduciary."  Someone once said "It's not bad to be a fiduciary, it's just bad to be a bad fiduciary."

Besides, hiring a fiduciary is itself a fiduciary function and may expose you to co-fiduciary liability - or at least a duty to monitor....

I have seen other similar situations and I just tell our client's it is nonsense.  It's called a "disturbing technique" (a basic sales tactic).  I would suggest the people bringing it are sleazy to start with (sorry if I offend anyone who is doing this - well, not really); just ask them to bring you any cases where such an action (just signing the 5500) actually caused a problem (chapter and verse, not some sales literature).  There won't be any.

Depending on the client: "They just are looking to get into your pants"; or "they just want to get into your pocket to sell you something that you almost definitely don't need and really don't want".

Don't worry; be happy!

We have a small 3(16) operation in our TPA shop.  I don't see how one can sign the 5500 without being a fiduciary but would not use this as a "sales" point.  We view it as a plan sponsor option because whoever hires us to do this is a fiduciary when they employ us and when they authorize us to sign the 5500.  Plan Sponsors should spend the money to hire us to do things they don't know how to do or to make sure someone has done these things; not to sign documents.

1 minute ago, Patricia Neal Jensen said:

We have a small 3(16) operation in our TPA shop.  I don't see how one can sign the 5500 without being a fiduciary but would not use this as a "sales" point.  We view it as a plan sponsor option because whoever hires us to do this is a fiduciary when they employ us and when they authorize us to sign the 5500.  Plan Sponsors should spend the money to hire us to do things they don't know how to do or to make sure someone has done these things; not to sign documents.

Excellent response!

Thanks, Larry.... sheesh... I am blushing

My company offers 3(16) services as well.  At first it seemed like a good idea, but when you implement it, it can be extremely difficult.  I have decided I will take it only in very limited circumstances. 

I do not believe, however, that hiring another party as the plan administrator is necessarily a fiduciary function.  If the plan document names the employer as the administrator and gives the employer delegation authority, then delegating that authority to a third party is a fiduciary function.  If, however, the sponsor amends the plan to define ERISAApple as the 3(16) administrator, I am of the view that is a settlor function, not a fiduciary function. 

The point is not to scare clients into hiring you.  The point is to see if I can make their life easier if they outsource a function they don't want to do for whatever reason - whether it is because they feel they are not qualified, are too busy, or for any other reason.  Ideally I like to try and ensure that the value I provide is equal to the value I receive.  Because, in the end, the love you take is equal to the love you make.  I don't see a difference between outsourcing the 3(16) function and any other plan-related function. With multiemployer plans, at least in the union context, they can even outsource plan sponsorship.  The same would be true with open MEPs (if we ever see them).  

As for personal liability, if the plan document names the employer as the administrator, I can't imagine a judge in the world holding the individual who signs the 5500 on behalf of the employer personally liable for penalties imposed on administrators, such as $1200+ a day (or whatever it is now) for a failure to file the 5500.  Companies cannot act without people, and if that person were liable instead of the company, effectively employers could never be the administrator.  That of course is contrary to the language of the statute.

As for personal liability for fiduciary acts, that raises the question of whether an employee or officer of a company can be a fiduciary if the plan document names the company as the fiduciary.  There is a lot of case law on that, and so I won't go into detail.  The short answer is often that person can be held to be a fiduciary.  It really depends on the facts and circumstances.  Moreover, as everyone knows, that person would be a fiduciary only to the extent of the company's fiduciary authority.  The person could also be a co-fiduciary, which also raises other case law, and I will go into no detail about that.    

Good point, ERISAAPPLE.  We do not accept appointment as Plan Administrator, however.  Our business model precludes putting ourselves in a position where we would have hiring and firing responsibilities over our brokers and advisors.

1 hour ago, ERISAAPPLE said:

I do not believe, however, that hiring another party as the plan administrator is necessarily a fiduciary function.  If the plan document names the employer as the administrator and gives the employer delegation authority, then delegating that authority to a third party is a fiduciary function.  If, however, the sponsor amends the plan to define ERISAApple as the 3(16) administrator, I am of the view that is a settlor function, not a fiduciary function. 

The point is not to scare clients into hiring you.  The point is to see if I can make their life easier if they outsource a function they don't want to do for whatever reason - whether it is because they feel they are not qualified, are too busy, or for any other reason.  Ideally I like to try and ensure that the value I provide is equal to the value I receive.  Because, in the end, the love you take is equal to the love you make.  I don't see a difference between outsourcing the 3(16) function and any other plan-related function. With multiemployer plans, at least in the union context, they can even outsource plan sponsorship.  The same would be true with open MEPs (if we ever see them).  

As for personal liability, if the plan document names the employer as the administrator, I can't imagine a judge in the world holding the individual who signs the 5500 on behalf of the employer personally liable for penalties imposed on administrators, such as $1200+ a day (or whatever it is now) for a failure to file the 5500.  Companies cannot act without people, and if that person were liable instead of the company, effectively employers could never be the administrator.  That of course is contrary to the language of the statute.

I like your approach - but keep in mind a few things.  First, even though the plan document can "name" an individual or entity as a fiduciary, it does NOT stop others from being a fiduciary by virtue of the functions they undertake.  I'd be hard pressed to find a situation where employees and/or the employer are not, through such functions, also a fiduciary.

As far as the value add that you and other 3(16)'s provide, I will raise the question that I have often raised on these discussions:  Apart from the "work" you do, what is the value add to being a 3(16) fiduciary in doing so?  We provide "paperless" loans without employer intervention.  We provide hardship distributions (checklist based) without being a fiduciary and without employer intervention.  We do the same for termination distributions.  We handled DRO's form start to finish without being a fiduciary, and without employer intervention.  So, where is the value add in doing such things as a fiduciary as opposed to doing them not as a fiduciary - which only in 0.01% of the time might involve talking to the employer when things just don't fit our checklists/process?

And as far as "personal liability" is concerned - one of the first things I was taught in law school was to NEVER EVER rely on a judge to make the right decision.  Set yourself up so the judge has no alternative but to rule in your favor (on whatever issue) knowing full well the other side is trying to do the same thing.  The law says "personal liability."  Assume that is the case and the judge will, if you fail to set a clear path, impose personal liability.  I've seen it happen - and a couple of times a year, the DOL broadcasts cases where exactly that has happened.

32 minutes ago, Patricia Neal Jensen said:

Good point, ERISAAPPLE.  We do not accept appointment as Plan Administrator, however.  Our business model precludes putting ourselves in a position where we would have hiring and firing responsibilities over our brokers and advisors.

My business model is to serve as 3(16) administrator.  The duties are limited to those required by statute.  i don't hire brokers or investment advisors.  The only service provider I have to select is the auditor, if one is required.  Even then I don't really select them.  I hire them and the sponsor or the plans, but I select them based on the advice and consent of the plan sponsor.  I would never agree to select an auditor that is not a member of the AICPA employee benefit plan audit quality center.  There is risk, but there is risk in everything we do.  

16 minutes ago, MoJo said:

I like your approach - but keep in mind a few things.  First, even though the plan document can "name" an individual or entity as a fiduciary, it does NOT stop others from being a fiduciary by virtue of the functions they undertake.  I'd be hard pressed to find a situation where employees and/or the employer are not, through such functions, also a fiduciary.

As far as the value add that you and other 3(16)'s provide, I will raise the question that I have often raised on these discussions:  Apart from the "work" you do, what is the value add to being a 3(16) fiduciary in doing so?  We provide "paperless" loans without employer intervention.  We provide hardship distributions (checklist based) without being a fiduciary and without employer intervention.  We do the same for termination distributions.  We handled DRO's form start to finish without being a fiduciary, and without employer intervention.  So, where is the value add in doing such things as a fiduciary as opposed to doing them not as a fiduciary - which only in 0.01% of the time might involve talking to the employer when things just don't fit our checklists/process?

And as far as "personal liability" is concerned - one of the first things I was taught in law school was to NEVER EVER rely on a judge to make the right decision.  Set yourself up so the judge has no alternative but to rule in your favor (on whatever issue) knowing full well the other side is trying to do the same thing.  The law says "personal liability."  Assume that is the case and the judge will, if you fail to set a clear path, impose personal liability.  I've seen it happen - and a couple of times a year, the DOL broadcasts cases where exactly that has happened.

The idea is that the plan sponsor is not acting as a fiduciary when it amends the plan to define the fiduciary.  There is no question I am acting as a fiduciary if I am the 3(16) administrator.  I think the biggest value I provide is risk transference.  Hire me and you won't find yourself as a defendant in a lawsuit, at least not as the administrator.  You won't be assessed any 5500 penalties, be liable for a failure to provide the plan document, etc.  In other words, you don't have to worry about the judge making the wrong decision.  You won't even be before the court.  Sure anyone can sue; we all know that.  By naming someone else other than the company or a committee as the plan administrator, the employer is in fact setting the most clear path possible.  

11 minutes ago, ERISAAPPLE said:

The idea is that the plan sponsor is not acting as a fiduciary when it amends the plan to define the fiduciary.  There is no question I am acting as a fiduciary if I am the 3(16) administrator.  I think the biggest value I provide is risk transference.  Hire me and you won't find yourself as a defendant in a lawsuit, at least not as the administrator.  You won't be assessed any 5500 penalties, be liable for a failure to provide the plan document, etc.  In other words, you don't have to worry about the judge making the wrong decision.  You won't even be before the court.  Sure anyone can sue; we all know that.  By naming someone else other than the company or a committee as the plan administrator, the employer is in fact setting the most clear path possible.  

I understand your logic - but as I indicated above, I think in almost all cases, the employer (through it's employees) is *still* going to be a fiduciary - maybe not THE Plan Administrator, but still a fiduciary, and as such, may still have liability.  Plus all of the individuals actors who perform fiduciary functions (whether they know it or not) can claim the title as well...

I disagree with the risk transference concept.  The concept of co-fiduciary liability comes into play as well, and even if their is a "proper" delegation to a 3(16), many other factors come into play with respect to other fiduciaries, etc.  I have yet to see a case where there was such a clear cut case of proper delegation (without interference) such that another fiduciary would be dismissed from a lawsuit.  It may be that we haven't seen any "3(16) cases yet - but in my experience ... well let's just say, I wouldn't want to defend the plan sponsor in that situation.

If you look at the case decisions in Enron I think you will find a mid-level employee got pulled in as a fiduciary for signing a Form 5500. I don't know if she was ultimately liable