When and Where Do Fiduciary Duties Apply?

In Chris Vanderwolk's third article, he simplifies the specifics of when someone becomes a fiduciary and where these duties are most prominent, both inside and outside of the context of ERISA.

Published: 03.19.2024

In Chris Vanderwolk’s Fiduciary Duties series, he has discussed who fiduciaries are and the rigorous standards they must meet. Now, he dives into the specifics of when someone becomes a fiduciary and where these duties are most prominent, both inside and outside of the context of the Employee Retirement Income Security Act (ERISA) of 1974.

Why should we consider when someone might become a fiduciary outside of ERISA?

Our common law legal system in the United States dates back to the post-Norman Era in England almost a thousand years ago. Since that time, judges in a common law system have looked to other indicators of fairness and justice. While we have a significant amount of statutes that guide the judiciary today, it is still important to understand the bigger picture to better understand the concept of a fiduciary.

Under what contexts do individuals act as fiduciaries?

Fiduciary relationships are formed when one person must act in the best interest of another, and ensure that their client’s best interests are represented, even if the client’s best interests are not aligned with those of the fiduciary. There are a number of scenarios in our day to day lives where we may have already experienced a fiduciary relationship, like:

Administering an Estate. The executor of an estate acts as a fiduciary when they distribute the estate’s assets to the beneficiaries of a will in accordance with the deceased’s wishes.
Corporate Board Members. Members of a corporate board do not act on behalf of the corporation, but rather on behalf of the shareholders. As board members, they have duties to the shareholders to return value to the shareholders. If you’ve ever heard of a “derivative” or “shareholder” lawsuit, you’ve heard of a suit alleging that a board (and it’s members) failed to uphold their duties to the shareholders.
Legal Representation. Lawyers are fiduciaries for their clients and must prioritize their client’s legal interest in their affairs. In an attorney-client relationship, the attorney is duty bound to work toward the client’s best interests, even if they are not directly aligned with the attorney’s. This concept helps to ensure that everyone can receive fair and effective representation.
Serving as a Legal Guardian or Conservator. Many of us first became aware of a conservatorship during the #FreeBritney movement. That case showed some of the challenges of a guardian or conservator not necessarily upholding their obligations to act in the best interests of the conservatee (that’s the official term for the person whose affairs are managed under a conservatorship).

In each of these scenarios, the interests of one person are represented by another who has significant authority to act. That person with the authority to act on the interests of another is a fiduciary, and they have legally enforceable obligations to meet the high standard of care we discussed in the second article in the series.

Pivoting to ERISA

ERISA narrows the world in which fiduciaries operate in that one is only a fiduciary under ERISA in the context of an employer or employee-organization Health and Welfare or Retirement Plan. (We’ll dive into the specifics of which plans are covered by ERISA in a future article).

A person is likely a fiduciary when they perform any number of tasks under an ERISA Plan where they have discretion to spend (or not spend) the plan’s money. This is true even if they disclaim any fiduciary obligation in their contracts because ERISA looks at a functional definition of a fiduciary in addition to those named as fiduciaries. (Yes, those contractual clauses where a TPA says they are not a fiduciary may not matter.)

Retirement Plans

Acting as a financial advisor or investment manager, particularly with discretionary control over investments. In fact, just giving investment advice for a fee makes a person a fiduciary under ERISA §3(21).
Plan fiduciaries of retirement accounts, such as 401(k) plans, who make decisions about the plan's management, administration, and investment options. Named or unnamed, any person who can choose a TPA, or select funds for example, is a fiduciary and duty bound to serve the plan participants.

Health and Welfare Plans

Selecting Service Providers. The person or committee that chooses insurance carriers, pharmacy benefit managers, care coordination tools, telemedicine vendors, third-party administrators, or any other vendor or service provider to the plan is a fiduciary to the plan and must act solely in the best interests of the plan and plan participants when they make those choices.
Determining Plan Coverage Provisions. The same is true for determining what will and will not be covered across the plan - the person or committee that determines what will be covered is a fiduciary to the plan.
Determining Individual Benefits Qualifications. Here, we’re not considering broad coverage criteria, but individualized qualifications. Think about when and individual files a claim for disability under the plan, or when there is a question of medical necessity for a particular medical treatment. In these cases, where a person or entity exercises discretion as to whether a particular claim, treatment, or condition is covered under the plan, that person or entity is acting as a fiduciary under the plan.
Providing Information or Misinformation About the Plan. This is perhaps the scariest trigger of a fiduciary duty for readers. Participants have brought claims of a breach of fiduciary duty when a person, acting on behalf of the plan, gave the participant incorrect or inaccurate advice leading to non-payment of an expected benefit. Take a look at Dawson-Murdock v. National Counseling Group, Inc. or Blackburn v. Reliance Standard for a more detailed exploration.

Know Your Role

It’s critical to understand when our actions may change our status from “advisor” to “fiduciary.” When that change occurs, it’s critical that we meet the high standard of care expected of a fiduciary by acting solely in the interests of the plan and its participants.

In Chris' next article, he will explore the rationale behind imposing such stringent standards on fiduciaries by looking at where fiduciaries have fallen short in the past. Join Chris as he continues to uncover the essentials of fiduciary responsibilities and the importance of maintaining trust and integrity in these critical roles.

Christopher Vanderwolk, Esq.
Fiduciary Duties Series: When and Where Do Fiduciary Duties Apply?