Fiduciary liability raises serious questions within companies about not only the quality of employee care but also concerns about what responsibilities fiduciaries outside of the company must meet for their clients. Often any claims of mismanagement or loss of retirement funds quickly turn into blaming rather than discussing how fiduciary care works. Thus, clarity on the extent of fiduciary responsibilities is crucial to managing your business retirement plans. Together, let’s discuss what fiduciary liability is as well as some responsibilities advisors have to their clients to uphold good fiduciary practices
What is Fiduciary Liability?
Any company that offers retirement plans has exposure to fiduciary liability claims. Fiduciary requirements are based on the “Prudent Man Rule” which requires fiduciaries to manage another's affairs and invest another's money with such skill and care as a person of ordinary prudence and intelligence would use in managing his or her own affairs or investments. A tough, subjective measurement. Yet, while most organizations may have experienced personnel and/or insurance to cover such claims, few know the limits or risks of fiduciary liability. Simply, fiduciary liability is a personal liability to the fiduciary that allows employees to hold their employers and company administrators legally responsible for retirement or investment plan misconduct. Common claims of fiduciary financial mismanagement or breach of duty are perceived as:
Making mistakes when administering health or welfare plans through improper enrollment or termination
Giving negligent counseling when administering retirement plans or investments
Risky investments in a qualified retirement plan
Improper or expensive share classes of investments offered in a qualified retirement plan
Wrongfully denying or improperly changing plan benefits
Hasty selection and/or monitoring of third-party service providers
In short, fiduciaries can derail employee retirement plans and cost employees valuable investment benefits by treating their accounts without care or concern. Companies generally provide protection against fiduciary liability claims to cover their organization and employees, but they also hire outside advisors to the plan where carelessness comes with severe consequences to third-party advisors, consultants and administrators as well.
Fiduciary Responsibilities
According to the 1974 ERISA law, fiduciaries are those who administer, manage or control benefits plans with the sole responsibility of serving clients’ best interests. The “Prudent Man Rule” holds a very high standard for those outcomes. As a result, fiduciary actions or mistakes on client finances hold heavy consequences. For this reason, the following guidelines are necessary to help companies and fiduciaries monitor all obligations regarding clients:
Care: Fiduciaries handle managing employee retirement and welfare plans; therefore, fiduciaries must take the utmost care and precaution when investing client funds as that’s their future income. Fiduciary liability can be claimed when fiduciaries make reckless or mistaken investments that result in a loss for clients.
Confidentiality: Clients expect fiduciaries to be completely discreet and professional with all their personal account information. This trust is needed for proper financial advisement between parties. By breaching or exchanging clients’ finances or company trade secrets, advisors can therefore be held liable as a fiduciary.
Obedience: Regardless of personal preferences for retirement or investment plan choices, a fiduciary is required to obey the client’s preferences exactly. Deferral or failure to follow client instructions will result in fiduciary liability claims of misused funds.
Loyalty: Before working with a client, it’s crucial that fiduciaries not have any economic or personal conflicts of interest that could influence their account management. Trust and loyalty between advisor and client require complete devotion to the client rather than personal profits. Therefore, action resulting in a private profit from client losses or competitor gains will incite a fiduciary liability claim.
While these guidelines are more or less common-sense practices, fiduciary liability can be claimed regardless of intention. Clients only recognize their loss of retirement pensions, profit sharing, stock purchases, or other benefits for medical, dental, life, and disability; nevertheless, fiduciaries will still be held accountable for the losses.
Though preventing fiduciary liability can be difficult, treating client retirement plans and investments with continuous, ethical care promises the best protection for everyone. However, in times where ethics and quality care don’t manage to satisfy clients, protect your business interests from serious claims with the right partners like RPCSI. Learn how to protect the fiduciary care of your business and contact us today!
