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Triangle Nose Goes and Fiduciary Liability

Published on: December 17, 2014

Have you ever had two very dissimilar things come to mind simultaneously? And while pondering both, did you realize there really is a thread that connects the two? I drew a connection between two seemingly random things recently — fiduciary liability coupled with a behavior I’ve seen popping up on television shows. Maybe you’ve seen the behavior; it looks like this: a group of friends assembled, each touching his or her nose with their index finger.

It’s called a “Nose Goes.” At this point I’m sure you’re wondering what in the world this has to do with fiduciary liability, but stick with me for a minute. According to Urban Dictionary, the “Nose Goes” is defined as, “a quick observation game typically played to determine who will be the person to either go first or committ an action together.” In short, individuals touch their noses as a way to shirk responsibility. A nose touch essentially says “I’m not it!” The last person to realize what is happening and to touch his or her nose is left to do the job.

Does the connection between this borderline adolescent behavior and fiduciary liability seem tenuous (at best) to you?

Often something fiduciaries do not know is that whether they accept it or not, the buck legally stops with them. There is no “Not it.” Fiduciaries are already duty-bound by assuming the role. If there is a breach in duty, fiduciaries will be held liable.

That sounds like a serious statement. It is, so it warrants further explanation.

The Law & Order of Fiduciary Liability

It is important to know each of the actions that can be taken against a fiduciary if you are functioning in the role.

  • Fiduciaries are under the Employee Retirement Income Security Act (ERISA), which is a federal law regulated by the U.S. Department of Labor.
  • Because ERISA is a law, breaking it opens a fiduciary up to criminal penalties.
  • Under ERISA, participants and beneficiaries are permitted to bring civil actions against a fiduciary that breaches her/his/its duty.
  • Furthermore, a fiduciary is held personally responsible.

Duty has a Limit: Checks on Fiduciary Responsibility

Though fiduciary liability is fully integrated into the role, there are liability limitations. Liability and culpability depends on timing. A fiduciary role has no set term; however, the service can be ended through retirement, termination or resignation. The liability only exists during the dates of service.

  • If the fiduciary role was ended (retirement, resignation or termination) and afterward a breach occurred, the fiduciary is not liable.
  • Similarly, if a breach in duty happened prior to becoming a fiduciary, the current fiduciary is not liable for the breach.
  • Even though the fiduciary is not liable in this circumstance, he/she must address the breach and attempt to rectify it, once it is discovered.

Not Shirking: Smart Ways to Manage Risk

Obviously, you can’t “Nose Goes” around liability. How can you protect yourself before being found liable?

  • The best way to minimize your liability exposure is to educate, monitor, document and evaluate yourself or your fiduciary on their responsibilities and obligations.
  • Purchase fiduciary liability insurance policies that specifically cover: plan sponsors, directors, officials and fiduciaries.
  • Know that fiduciary liability insurance is not the same as a fidelity bond—a fidelity bond only covers the plan.
  • It may benefit you to hire professional trustees and investment managers to assist in making plan decisions.

Be encouraged. By taking proactive steps to further your fiduciary education, like reading our fiduciary series, you help limit your liability. Also, you will be better equipped to address issues head on—like a true leader.

Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member

Written by Ken Nicklas
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