Back of the Napkin: Fiduciary Duty

Learn More About Fiduciary Duty

A fiduciary duty is a responsibility to put someone else’s best interests before your own.

Often, that means the person with the duty (the “fiduciary”) must make decisions that financially benefit the person to whom the duty is owed (the “principal”) rather than making decisions that financially benefit the fiduciary.

When applies

A fiduciary duty is a legal responsibility that can arise in certain situations when one person is in a position of trust or power over another person’s interests. Here are some situations when the duty may apply:

When

Who is the fiduciary?

Whose interests must come first?

Running a corporation

Board of directors

Shareholders

Legal representation

Attorney

Client

Managing a trust

Trustee

Trust beneficiaries

Medical care

Doctor

Patient

Managing a retirement plan

Trustees and administrators

Plan participants and beneficiaries

When may small-business owners owe a fiduciary duty?

If you own a small business and sponsor a retirement plan for your employees, then you may have a fiduciary duty to the plan participants and beneficiaries. Retirement plan fiduciaries typically include:

  • The trustee
  • The plan administrators
  • The investment managers

At least one fiduciary for the plan must typically be named in the plan documents.

Why do small-business owners have a fiduciary duty?

Most private sector retirement plans, such as 401(k)s, are subject to the rules of the Employee Retirement Income Security Act, or ERISA. This law imposes a fiduciary duty on those who have control over retirement plan assets to help protect employees’ savings from misconduct and safeguard workers’ retirements.

What it is

Some aspects of your fiduciary duty are fairly abstract—such as the obligation to act with skill, prudence, and diligence, and the obligation to act solely in the interests of participants and their beneficiaries.

But in other senses, your fiduciary duty to the plan creates some concrete obligations, such as:

  • Following the plan documents as long as they don’t conflict with the law
  • Diversifying the plan’s investments
  • Making sure the plan’s fees are reasonable

What it isn’t

At the same time, you’re typically not on the hook for every potential bump in the road.

If you’ve fulfilled your responsibilities in choosing appropriate investments for the plan, then you likely won’t be at fault if some of those investments nonetheless lose value. If your employees are in charge of their own investment decisions and you’ve given them sufficient information about the plan and their investment options, then you likely aren’t at fault if they happen to make poor decisions.

Why it’s important

It’s important to understand when you may have a fiduciary duty and what your responsibilities may entail because breaching a fiduciary duty—even unintentionally— can potentially lead to legal liability. The consequences of breaching a duty could include:

  • Being sued
  • Financial liability for losses
  • Financial liability for any ill-gotten gains
  • Being removed as a fiduciary

When in doubt

If you think you may have a fiduciary duty or you’re not sure of your responsibilities to your employees, consider consulting with an expert, such as an attorney. A lawyer who specializes in ERISA law can help make sure you understand and fulfill any obligations.

Key takeaways:

  • A fiduciary duty is a legal obligation to put someone else’s interests ahead of one’s own.
  • Fiduciary duties typically arise in relationships of power or trust, such as between attorneys and clients or trustees and beneficiaries.
  • Small-business owners may have fiduciary duties to their employees if they sponsor a retirement plan.
  • Such duties can include obligations to diversify plan assets, follow plan documents, and ensure the plan’s fees are reasonable.
  • Breaching a fiduciary duty can result in serious consequences. When in doubt about your legal responsibilities, consult an expert, such as an attorney.
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