In March, the Department of Labor (DOL) filed two lawsuits against former NFL player, Michael Vick, for taking illegal withdrawals from a pension plan of one of his companies—and for which he served as trustee. The DOL complaints allege that Vick withdrew more than $1.35 million dollars from the pension plan in violation of his fiduciary duties.

In one of the cases—Michael Vick’s personal bankruptcy proceeding—the DOL took the position that the withdrawal of the pension funds constituted a “fraud, defalcation or embezzlement” under the bankruptcy code. The liability for that type of conduct is not dischargeable and, if the court agrees with the DOL, Vick will continue to be personally liable after the bankruptcy.

While this case is interesting because of the celebrity status of the defendant, I am writing about it because the DOL also alleged that two of Vick’s former financial advisers helped with the withdrawals from the pension plan and, because of that participation, they were personally liable as co-fiduciaries.

The moral of this story is fairly obvious . . . don’t help plan sponsors or other fiduciaries improperly use plan money. If an adviser participates in that kind of a transaction, the adviser can be personally liable, even though he did not receive any personal benefit from the transaction.

But, there is also another, more subtle, point. That is, when an adviser serves as a fiduciary to a plan—either acknowledged or functional, the adviser has a duty of loyalty to the participants. The adviser can be meeting and working with the plan sponsor, but the adviser’s primary duty of loyalty and care is to the participants. As a result, there may be times where the adviser will need to refuse to participate in a transaction, and even run the risk of being fired, because the duty of loyalty to the participants conflicts with the request of the plan sponsor. In fact, it can be worse than that. We have been involved in cases where advisers have been put in the position of reporting their clients to the DOL in order to avoid exposure to co-fiduciary liability. I can tell you from experience that these are difficult situations. When and if you get involved in a situation like that, make sure to seek expert legal advice. The answers are not always obvious.

Resigning may not be a solution. That is because an adviser is ordinarily required to take affirmative steps to protect the participants.

 

Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.


Source: Adviser Report