Department of Labor Targets TPA As Fiduciary In Connection With Voice Automated 401(k) Services
Several years ago, the Pension and Welfare Benefits Administration (PWBA) of the United States Department of Labor (DOL) announced that it intended to expand its pursuit of retirement plan service providers as a means of restoring assets available for distribution to plan participants and beneficiaries. Since the PWBA's mission is limited to prosecuting breaches of fiduciary duty and prohibited transactions, the PWBA is focused on expanding the definition of "fiduciary" to be as broad as possible.
The law firm of Reish & Luftman is currently handling a case that serves as an example of the DOL's stepped-up efforts against plan service providers. In that case, our client is a third party administrator ("TPA") and recordkeeper that provides services to a sponsor of a 401(k) plan. Plan participants are able to alter their investment allocations by using a voice-automated telephone system operated by the TPA. The TPA, in turn, communicates the participants' investment elections to an insurance company that holds the plan assets.
The plan sponsor, in this instance, has a complicated payroll system. The sponsor has several divisions, each of which generate separate payroll records in several different formats. From time to time, the payroll information delivered to the TPA was delivered piecemeal and, in some cases, the information delivered was internally inconsistent. Because the payroll information from the sponsor was sometimes slow in coming or inaccurate on its face, the TPA sometimes encountered delays in conveying the allocation information to the insurance company. And, according to the PWBA, the TPA requested in at least one instance that the insurance company hold the employee deferrals and company matching funds in a "suspense account" pending delivery of complete and accurate allocation information.
The PWBA now asserts that the TPA became a plan fiduciary when the TPA influenced the way in which plan assets were invested. It claims that the TPA exercised discretionary authority over plan assets by (1) controlling the flow of allocation instructions between participants and the insurance company, and (2) requesting that the insurance company hold plan assets in an account that earned less interest than an alternative account that had apparently been specified for that purpose in the contract between the plan sponsor and the insurance carrier.
The PWBA is alleging that the TPA breached its fiduciary duty to the plan, and is seeking to force the TPA to compensate the plan for any earnings that the plan lost as a result of (1) any alleged delays in communicating allocation information, and (2) its request that the insurance company segregate the plan assets in separate investments pending communication of asset information.
Our position is that neither (1) the act of communicating participant investment information, nor (2) the TPA's request that the insurance company segregate plan assets pending receipt and communication of participants' investment elections, gives rise to a fiduciary relationship between the TPA and the plan. Absent fiduciary status, the TPA cannot be held liable for breach of fiduciary duty.
We believe that our position is the correct one under the law. ERISA's definition of "fiduciary" is a functional one: a person is a fiduciary only to the extent (1) he provides investment advice to the plan for a fee; (2) he has discretionary control or discretionary authority over the administration of the plan, or; (3) he has authority or control over the assets of the plan. We do not believe that the TPA in this instance satisfies any one of these three criteria. To the best of our knowledge, there are no reported cases directly on point in support of the PWBA's position that these facts create a fiduciary relationship. The simple act of relaying investment allocation elections certainly appears to be the type of "ministerial" act that the PWBA's own regulations say does not rise to "fiduciary" conduct.
It remains to be seen whether the PWBA feels strongly enough about its position in this case to justify initiating litigation against the TPA to establish a breach of fiduciary duty. It is also unclear whether this case is representative of a nationwide PWBA policy, or whether the PWBA's position in this case is limited to the particular DOL region in which the case arises. Until these questions are answered, retirement plan service providers should govern their affairs accordingly in order to avoid potential liability. Among other things, service providers should document their own files scrupulously to explain delays in communicating participant investment elections. If delays occur because of breakdowns in information from plan sponsor to service provider, the service provider should explain that breakdown in correspondence to plan fiduciaries.
Although we strongly disagree with the PWBA's position in this regard, service providers should recognize that the PWBA appears to be stepping up its efforts to label them as fiduciaries. In that uncertain climate, service providers should monitor their own actions closely, make sure that they have adequate insurance coverage to fend off fiduciary breach claims by the PWBA, and scrupulously document their files.
© 1999
by the American Society of Pension Actuaries. Article originally appeared in the ASPA ASAP, No. 99-25, October 4, 1999.
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