Last week an advisor reached out to me looking for an article on a topic that comes up with remarkable frequency.
Specifically, this advisor was dealing with a situation where a client was considering hiring their brother-in-law as the plan advisor, and wondered if we had ever written an article dealing with that situation. It’s not the first time I have been asked that, though sometimes it’s a cousin, a friend, a friend’s cousin, or a cousin’s friend.
When that situation comes up – and come up it will – this is what I would tell them:
If you’re a plan sponsor, you’re an ERISA fiduciary.
If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. Ditto if you are able to hire individuals to control those assets – including your brother-in-law.
Plan decisions you make as an ERISA fiduciary – including hiring those who provide plan services - must meet certain criteria.
As an ERISA fiduciary you have a legal obligation to act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them. Does hiring your brother-in-law meet that test? Would it look that way to a judge?
As an ERISA fiduciary, you’re expected to be an expert — or to hire help that is.
You may not have been told this when you were given this responsibility, but when you, as an ERISA fiduciary, act for the exclusive purpose of providing benefits, you are legally bound to do so at the level of a hypothetical expert. Lacking that level of expertise, the Labor Department says that “a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.” Like your brother-in-law?
As an ERISA fiduciary, you’re expected to fire help that isn’t expert.
The flip side of hiring an expert is being able to terminate that relationship if they aren’t fulfilling their obligations. Think how awkward Thanksgiving dinner will be if you fire your brother-in-law. Think how awkward it will be standing in front of a judge if you should have – and don’t.
Your liability as an ERISA fiduciary is personal.
There are any number of things that can go wrong in running a workplace retirement plan. That’s why it’s important to hire experts – and to keep an eye on them. But don’t forget that ERISA fiduciaries can be held personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.
It is, of course, possible that your brother-in-law is an expert in such matters, that he brings real value to your plan and the participants and beneficiaries it serves, and that your decision to engage his services is based solely on your desire to fulfill your fiduciary obligations.
If so, by all means proceed – just take care to make sure – as you should with any such hire – to document the rationale behind that decision.
Your brother-in-law will understand.
