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Northwest OH Legal Blog

Tuesday, March 4, 2014

Does Hiring a Third Party Fiduciary Let Named Plan Fiduciaries Off the Hook?

Many fiduciaries of health and welfare, pension, 401(k) and other benefit plans have begun to hire third party fiduciaries to seemingly delegate their complex responsibilities under ERISA, the Internal Revenue Code, HIPAA, COBRA and most recently, the Affordable Care Act.  While it may appear that this delegation relieves named fiduciaries from damages suffered by a plan and its participants in the event that a breach occurs, this is a falsehood. A named fiduciary (often a named plan Trustee) is never completely insulated from responsibility for its duties to a plan, its participants and its beneficiaries.

Fiduciaries must be mindful of several issues when they agree to appoint a third party fiduciary.  First, their plan document must specifically allow such an appointment and named fiduciaries cannot act beyond the plan’s document when implementing any third party duties.  Additionally, the third party fiduciary must formally acknowledge its responsibility as a fiduciary to the plan as well as liability for its wrongful acts or failure to act in carrying out its fiduciary responsibilities.

Section 405(c) of ERISA does afford named fiduciaries with some protection for the wrongful acts or omissions of another party. It provides that a plan may include procedures for the named fiduciaries to delegate responsibility by designating a third party to carry out their responsibilities under the plan. If the delegation of fiduciary responsibility to a third party meets certain requirements, the named fiduciary may not be liable for the acts or omissions of that third party. However, other Section 405 requirements include significant limitations beyond compliance with the specific appointment procedures contained in the plan document. 

A named fiduciary will be liable for the third party fiduciary’s acts or omissions to the extent the named fiduciary violated ERISA’s “prudent person” standard of care as set out in ERISA Section 404(a)(1)(B).  This section of ERISA provides that a fiduciary must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”  This standard would apply to fiduciaries when they delegate responsibilities to a third party fiduciary, when they implement a plan’s delegation procedure or when they monitor the existing third party fiduciary. Therefore, a named fiduciary is liable for the acts or omissions of a third party fiduciary unless it is clearly evident that the fiduciaries acted solely in the interests of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits under the plan in a manner deemed prudent under ERISA.

So is a plan trustee or named fiduciary ever “off the hook” even if they delegate duties, like plan investments or administration to a third party?  The answer to those questions would be a resounding, “No!”


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