Christopher Vanderwolk Simplifies Understanding Fiduciary Duties
With an increased interest in fiduciary duties, Chris Vanderwolk launches a new series to educate readers about fiduciary duties.
Published: 03.14.2024
It's not surprising, given the recent news surrounding the Johnson and Johnson (J&J) fiduciary lawsuit that we have seen an overwhelming interest on the topic of Fiduciary Duties. Astute observers will note that the J&J suit is just one in a recent string of lawsuits alleging a fiduciary breach, following in the steps of suits like Kraft-Heinz v. Aetna, and Mass. Laborers' Health & Welfare Fund v. Blue Cross Blue Shield of Massachusetts.
With blockbuster litigation against household names for alleged breaches of fiduciary duty, it's important to know what a fiduciary is, as well as the proper conduct to avoid potential headaches. Today we'll tackle the first question: who is a fiduciary?
Defining Fiduciary
Black's Law Dictionary defines a "Fiduciary" as:
- Someone who is required to act for the benefit of another person on all matters within the scope of their relationship; one who owes to another the duties of good faith, loyalty, due care, and disclosure <the corporate officer is a fiduciary of the corporation>.
- Someone who must exercise a high standard of care in managing another's money or property <the beneficiary sued the fiduciary for investing in speculative securities>.
Ancient Origins
The fiduciary concept dates back at least to the Roman "fiducia," which was a form of security agreement similar to a modern trust. The concept further evolved through medieval England, where the duties and obligations of trustees and fiduciaries took the shape that we recognize today.
Jumping Forward to 1974
This year we'll celebrate ERISA's 50th birthday. ERISA §3(21)(A) defines a fiduciary as a person who "exercises any discretionary authority or discretionary control respecting management" of a plan or disposition of plan assets.
What does it mean to exercise "any discretionary authority" of a plan or plan asset?
Simply put, a person exercises discretionary authority over a plan or plan asset when the person can determine whether and how the plan operates, or how the plan will use plan assets. In even simpler terms, a person exercises discretionary authority when they determine how the plan will spend money.
Examples could include:
- Selecting an insurer
- Determining medical necessity for coverage purposes
- Setting fee schedules
- Setting reimbursement schedules
- Determining eligibility requirements
- Investing plan assets
Typically, fiduciaries include financial advisors, trustees, corporate board members, and attorneys, among others. In an ERISA environment, fiduciaries can include HR administrators, third-party service providers, benefits committees, and even benefits brokers and consultants if they meet the functional test.
When a person is acting as a fiduciary, they must prioritize their clients' or beneficiaries' interests above their own. This role is critical because it involves handling another's financial well-being, legal matters, or other personal interests. The fiduciary's actions can significantly impact the financial future and security of the individuals or entities they serve.
Are you a fiduciary?
This is the million-dollar (liability) question. Are you exercising discretion, or making a recommendation? For most benefits consultants, real discretion sits elsewhere. The employer is generally making decisions on behalf of the plan, even at your recommendation. But look further into the plan, is a benefits consultant administering a Health Reimbursement Arrangement (HRA) on behalf of the plan? Is the HRA administrator performing a ministerial function, where they only act at the direction of the plan, or are they making black-and-white decisions out of a gray area?
The real answer to "are you a fiduciary" is anything but black and white, and requires a fact-specific inquiry. Unfortunately, there aren't a lot of simple answers in this realm.
In Chris' next post he will explore the standard of conduct a fiduciary must meet. Understanding fiduciary duties is essential for anyone in a position of trust or looking to engage with professionals who will act in their best interest.
Christopher Vanderwolk, Esq.
Fiduciary Duties Series: Who is a Fiduciary?
