Industry publication Fiduciary News spoke with Drinker Biddle partner Fred Reish on fiduciary conflicts involving small business owners and their involvement as both asset holders and plan sponsors with fiduciary responsibility of their company’s 401k plan.

The publication reported that because of their multiple roles, small business owners are often faced with conflict-of-interest scenarios when dealing with their own personal financial interests and the best interests of the company’s 401k plan participants.

Fiduciary News turned to Reish for insight into whether or not a business owner and plan sponsor’s contemplated retirement asset transfer for personal gain would represent a fiduciary breach.

“I don’t recall the case, but there is at least one case in which the ruling was that a fiduciary’s obligation was to act in the best interest of all of the participants, not of any particular participant,” Reish said. “That suggests that if a fiduciary acted to benefit one participant to the detriment of the other participants, it could be a fiduciary breach.”

Still, the plan design alone does not offer complete safe harbor from the potential breach. “The fiduciary breach could be a decision that is not in the best interest (‘prudent’) of the plan or participants as a whole,” Reish added. But, if the plan is amended to provide for brokerage accounts and each participant is informed of that right, then arguably any participant could select a brokerage account and then there would not be a breach for that reason. But, if the owner-fiduciary’s account does not share in the allocation of the recordkeeping expenses, then there could be a breach for using an allocation method that was not prudent. There could also be a prohibited transaction for using plan assets (of the other participants) to pay the owner-fiduciary’s part of the recordkeeping costs.”

Reish offered an example: “Assume that the increased cost for the other participants would be that the recordkeeping costs would be allocated to the remaining participants, and the owner-fiduciary would no longer pay a proportionate share of those costs. That raises another fiduciary issue of the decision on how to allocate recordkeeping costs. The question is whether a prudent fiduciary would allocate all of those costs to some participants but allow others to be in the plan without costs. The problem could be solved by having the plan sponsor pay the recordkeeping costs. In that case, the investments for the rank-and-file participants could be very low cost. Between eliminating the payment of recordkeeping costs and providing low-cost, non-revenue sharing investments for the participants, I think the situation becomes very manageable.”

Reish added, “I think there is an open question of whether a fiduciary investment adviser would be a fiduciary for this purpose. But he or she would be a co-fiduciary and, upon becoming aware of a fiduciary breach, would have a legal obligation to protect the participants, for example, to report the breach to the DOL. Obviously, no one wants to get to that point in a relationship. So, the better approach would be to tell the owner about the adviser’s concerns and recommend that the owner-fiduciary consult with an ERISA attorney.”

Source: Fiduciary News
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