This article begins a series concerning Fiduciary Responsibility under the Employee Retirement Income Security Act (ERISA). Few fiduciaries understand their duties, the liabilities associated with their responsibility, or whether they are even fiduciaries. This first article provides an overview of fiduciary responsibility under ERISA and some basic practices fiduciaries must take to exercise their duties.
Basics of Fiduciary Responsibility under ERISA
The role of a fiduciary is paramount underthe Employee Retirement Security Act.[1] ERISA provides protections for participants and beneficiaries and specifies fiduciary standards of conduct. Yet many who serve as fiduciaries are unaware of their legal obligations. There is also a misunderstanding about the extent of fiduciary responsibility service providers have under ERISA.
The operation of a retirement plan requires many participants. Some are clearly identified as Fiduciaries, others actions make them fiduciaries, while a third group acts under the direction or control of a fiduciary. ERISA defines a fiduciary[2] to the extent an individual
Exercises discretionary authority or control respecting management of a plan or disposition of its assets.
Renders investment advise or has authority or responsibility to do so, or
Has discretionary authority or responsibility in the administration of the plan.
A fiduciary has four primary duties[3] which must be carried out to discharge those duties solely in the interest of the beneficiaries and participants interest.
Duty of exclusive purpose
Duty of prudence
Duty to diversify
Duty to follow plan documents.
Failure to follow these duties may expose a fiduciary to personal liability to restore losses or profits. Willful violation also exposes fiduciaries to criminal penalties.
ERISA specifies five prohibited transactions[4] that a plan may not engage in with a party in interest. They include:
A sale of property between a party in interest and the plan.
Lending money between a party in interest and the plan.
Furnishing goods or services between the plan and a party in interest.
Transfer or use of plan assets by a party of interest.
Acquiring employer securities or real property in violation of ERISA.
A fiduciary may not:
Deal with plan assets in its own account or own interest.
Act in a transaction where the fiduciaries’ interest are adverse to the plan or its beneficiaries.
Individually receive anything of value from someone dealing with the plan.
There are basically two types of fiduciaries. The first is someone named in the plan document who has responsibility for managing the plan’s assets. The other are fiduciaries by reason of his/her actions becomes a fiduciary . Named fiduciaries include:
Plan administrator
Plan Trustee
If the plan so provides any person may serve as both Plan administrator and Plan trustee.
Plan documents usually control a Plan’s administrator in this regard. However, delegating responsibility is considered a fiduciary action. The appointing fiduciary has the obligation to prudently select and monitor the performance of its appointees. Thus when a plan manager appoints an investment manager the other fiduciaries are relieved of this responsibility and, as long as the appointing fiduciary is prudently selected and monitored there is a real transfer of risk of the investment decision responsibility.
An individual or entity can also become a fiduciary by filling a void. For example, a plan sponsor’s chief financial officer may begin to make investment decisions for the ERISA plan for lack of action by the Plan administrator or expedience. By so doing the CFO becomes a fiduciary without realizing the consequences. Such a sequence of events can lead to further exposure if the CFO discovers an act of self dealing between the employer and the plan. The CFO must remember that his/her duties to the plan are paramount.
ERISA specifies three circumstances[5] that give rise to liability for a fiduciary.
A fiduciary knowingly undertakes to conceal, an act or omission of another fiduciary, knowing that such act is a breach
A fiduciary in performing its responsibilities has enabled another fiduciary to commit a breach
The fiduciary has knowledge of another fiduciaries breach and does not make reasonable efforts to remedy the breach.
A service provider can be considered a fiduciary by virtue of rendering investment advice for a fee. While some acknowledge this responsibility as a co-fiduciary this approach does not transfer liability as previously discussed. The provider may later claim advisory capacity without discretion. Thus the importance of getting a service provider’s duties and responsibilities in writing. An investment consultant must acknowledge fiduciary status so they are bound by the duties of prudence, diversification, and adherence to plan documents.
Documentation is the cornerstone of demonstrating sound fiduciary governance and prudent decision making. The first step is to formally identify all plan fiduciaries and each fiduciary’s responsibility to the plan. Second all fiduciaries should meet on a regular basis. Thirdly, no fiduciary should perform multiple functions for a plan; the opportunity for conflict of interest is just too great. Finally, all documents and paperwork that relate to the plan or the decision-making process should be organized and accessible.
Conclusion
Litigation for fiduciary breaches under ERISA is growing exponentially. The burden of proof in such cases lies with the plan fiduciaries. Liability is not necessarily determined by investment performance, but on whether prudent investment practices were followed.
The most effective strategy for achieving the “exclusive purpose” of providing benefits for plan participants is to establish and follow documented procedures that demonstrate a prudent process. Such an approach will provide greater clarity into plan composition and performance, enabling fiduciaries to make better decisions and help their plan participants retire with meaningful benefits.
[1] Brussian v. RJR Nabisco
[2] ERISA Para. 3(21) (A).
[3] ERISA Para. 404(a)(1).
[4] ERISA Para. 406(a)(1).
[5] ERISA Para. 405(a).
