Many plan sponsors deal with vendors (administration firms, mutual fund companies) who likely have clauses in their service contract stating that they are NOT fiduciaries to the Plan. Language may state that their duties are 'ministerial' in nature and that they provide services only at the direction of the Plan Sponsor. Many vendors do occasionally exercise some discretion in their work with clients. Consequently, while the vendors contract disavows any liability for their actions and compels the Sponsor to hold them harmless in the event of litigation, a vendor’s exercise of discretion will likely put them over the vendor boundary and change their status to that of co-fiduciary. Once a court designates co-fiduciary status, there is some likelihood that the hold harmless language of a vendor’s contract will be stricken by the court. This is particularly true if the litigation involves the issue of whether discretion was exercised by the vendor. Hold harmless language will not hold up in court if the issue pertains to the conduct of fiduciary duties.

One problem area is where vendors are recommending funds, or mapping assets from one investment to another, yet claiming non-fiduciary status. Fund recommendations and mapping are discretionary activities which likely would meet the test of being a fiduciary if examined by a court. However, the fund company may claim that their activities are a suggestion or proposal and not a recommendation. This area will be a subject of increasing litigation in the future as vendors are held to account for their actions regardless of their claims not to be fiduciaries.

One of the preeminent ERISA defense counsel in the United States, Thomas Hoecker, has stated regarding vendors offering investment menus and fund mapping;
"If you know what you're doing, go ahead and do it. If you don't know what you're doing, hire an expert. If you're foolish, go ahead and let your vendor do it."

Denali FM’s position is that now is a very good time for plan sponsors to make certain that your vendor(s) completely understand the issue of co-fiduciary status. First, review the language in your vendor contract(s) to determine if ministerial or hold-harmless language has been utilized. Second, put your vendor(s) on notice, in writing, regarding what constitutes fiduciary behavior and the application of the Exclusive Benefit Rule of ERISA. Document the fact that you have sent this notice to your vendor(s) so there is a permanent record of your action. Third, review your vendors actions (past, current, or proposed) to determine whether they meet the standard of the Exclusive Benefit Rule and demonstrate an exercise of discretion.

If you are unsure how to document a vendor’s acknowledgement of fiduciary status, Denali FM's FACS™ documentation suite includes a sample documentation solution. Should you wish to obtain a copy, please call or email us.

If, in the process of fiduciary discussions or documentation, your vendor is unresponsive or resistant, what does this tell you? Have you assumed that part of the vendors job/service is providing fiduciary cover for you, your Plan Committee and Plan? If that assumption now appears inaccurate, and your past confidence misplaced, how should you and your fellow fiduciaries react to this new information? This would be an excellent time to engage in a well-documented process of seeking vendors who acknowledge the fiduciary boundaries, their co-fiduciary status, and whose conduct of business and Plan/participant interaction reaches the standards of the Exclusive Benefit Rule. It also may be advisable to consult with qualified ERISA counsel should specific questions or concerns arise regarding previous vendor’s behavior.

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