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The Plan Administrator’s Selection of Investment Options is a Fiduciary Concern

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Sherry A. Stein
Foster Swift Employment, Labor & Benefits Quarterly
Spring 2011

One of the ongoing obligations of the Plan Administrator (usually the employer) is to select the investment options that will be offered under a qualified retirement plan. Many plans, in particular 401(k) plans, allow the participants to direct the investment of the amounts allocated to their respective accounts. Plan Administrators often believe that by allowing participants to direct the investment of their account balances, the Plan Administrator is relieved from fiduciary liability under ERISA Sec. 404(c), because the participant is making the investment choice. The U.S. Department of Labor (DOL), however, has taken the position that the Plan Administrator’s selection of the investment funds is not protected by ERISA Sec. 404(c). Several Circuit Courts have rejected the DOL’s position, concluding that a fiduciary that has committed a breach of its duty in the selection of an investment option may not be held liable because the loss resulted from the participant’s decision to select the option.

Recently, the Seventh Circuit followed the DOL’s position and denied a Plan Administrator protection under ERISA Sec. 404(c) for its selection of investment options offered to the plan participants. The Court held that the selection of plan investment options and the decision to continue offering a particular investment option are fiduciary duties that are not protected by ERISA Sec. 404(c). The Court noted that the purpose of ERISA Sec. 404(c) is to relieve fiduciaries of liability for decisions made where the fiduciary has no control, such as the participant choosing how to allocate his account balance among the investment options offered by the Plan Administrator. The Court continued to state that the selection of investment options is not within the participant’s control. This selection is a decision of the Plan Administrator and may subject the fiduciary to a breach of its duty if the investment options offered result in a loss to the participant.

While Michigan’s Sixth Circuit has not ruled on this issue, it would be prudent for a Plan Administrator to carefully exercise its fiduciary duty when selecting investment options for a participant directed qualified retirement plan.

If you have any questions, please contact Sherry Stein at 517.371.8269.