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Fiduciary Liability and Employee Benefit Services Explained


If you are involved in your company’s benefits plan, no matter what you offer or how the plan is administered or by whom, you may hold fiduciary responsibility in some fashion.

Fiduciary refers to an individual or entity with responsibilities of trust, such as a trust company or a registered investment adviser. But in the case of employee benefit services plans, it can also mean the business’ owner or executives.

“If you’re involved with your company’s employee benefit services plan–maybe you’re in the HR department of a big company or someone wearing many hats in a small business–in either case, you may have a lot more fiduciary liability than you realize, and even be personally liable if an employee brings a lawsuit related to their benefit plans,” says Scott Goodwin, a CPA with Wolf & Company.

You can place yourself in a position of a “functional fiduciary” by doing something as simple as discussing investment options with an employee. And that means you could have personal liability, Goodwin says. “Recent case law found that individual plan participants can sue plan sponsors for breach of fiduciary obligations.”

You place yourself in the position of fiduciary when you are making decisions for the plan (i.e., using discretion in administering and managing a plan or controlling the plan’s assets), says John M. Stanton, managing director of Insperity Retirement Services.

What are some things you should do about your position and what are some of the things you should be aware of? Here is what Stanton recommends:

  1. Exclusive Benefit Rule: Act solely in the interest of plan participants and their beneficiaries.
  2. Duty of Loyalty: Put the participant first in all decisions made.
  3. Prudent Expert Rule: This is a standard requiring the fiduciary to invest in funds that a reasonable expert would invest in who is interested in receiving a good return on income while preserving capital.
  4. Diversification: This helps to minimize the risk of large investment losses to the plan.
  5. Plan Documents: This documentation serves as the foundation for plan operations. It must be followed unless it is inconsistent with the Employee Retirement Income Security Act.
  6. Expenses: Understand what a plan’s expenses are and pay only reasonable expenses.

You should also consider how you can minimize the risk of liability as a fiduciary. Stanton advises either documenting processes used to make fiduciary decisions or outsourcing hiring a service provider to handle fiduciary functions. Understanding your responsibilities as they relate to employee benefit plans will go a long way toward mitigating potential risks.