Employee Benefits: What It Means to Be a Fiduciary, as appeared in CFO JournalDecember 7, 2011
One of the most important and controversial topics in the realm of employee benefits in the past year involves the definition of a fiduciary. The term has caught the attention of everyone involved in the world of retirement plans, especially as the Department of Labor has taken on the task of broadening its definition under the Employee Retirement Income Security Act of 1974.
The DOL issued a proposed rule redefining "fiduciary" late last year, but under pressure from the public and some members of Congress, the regulations were withdrawn in September 2011. The DOL is now expected to issue in 2012 an amended definition of "fiduciary" intended to provide strong protections for plan participants and beneficiaries. With the increased emphasis placed by the DOL on who is a fiduciary, retirement plan decision-makers (who may be C-level officers) should confirm that good practices in plan governance are in place.
The Basics of Fiduciary Duty
A fiduciary in the context of retirement plans (such as 401(k) plans) is any person who exercises his or her own judgment or discretion in administering or managing a plan, or who has control over plan assets. Fiduciaries generally include the plan's trustee, investment advisers, plan administrative or investment committee members, and those who select committee members. Fiduciaries also may include the company and its officers and board of directors. Accordingly, an officer or director who may not be directly involved in managing the company's retirement plan may still be a fiduciary if he or she participates in selecting committee members. Whether or not an individual is a fiduciary depends not on the person's title but on the functions performed on behalf of the plan.
Generally, fiduciaries have a duty to act solely in the interest of plan participants and their beneficiaries, and with the exclusive purpose of providing benefits to them. Any form of self-dealing is a clear breach of this duty. Fiduciaries also must carry out their responsibilities prudently, disclose complete and correct material information to all plan participants and beneficiaries, monitor and evaluate the performance of service providers, follow the terms of plan documents, appoint other fiduciaries, select and monitor plan investment vehicles, interpret plan provisions, and exercise discretion in denying or approving benefit claims.
Predictably, it is not possible to rid oneself of his or her fiduciary duty by delegating it to a third party, such as a service provider, or by including disclaimer language in the plan document. Even when certain duties are delegated, those who hired the service provider retain the duty to monitor and evaluate the performance of the service provider.
Personal Liability of Fiduciaries
A lot is at stake: whether or not an individual is a fiduciary is of utmost importance given the personal liability attached to fiduciary responsibility. Additionally, when claims of impropriety in the management of a retirement plan are made, courts will look first to the plan's fiduciaries to determine whether they carried out their duties in accordance with the high standards required under ERISA.
Under ERISA, fiduciaries who breach their duties and cause the plan to incur a loss are personally liable. Generally, this means that the fiduciary must make the plan whole and return to the plan any personal profits gained through the use of plan assets, as well as an additional 20 percent penalty on the amount of the loss and other equitable or remedial relief that a court may deem appropriate.
The key to limiting personal liability is to prove that the plan fiduciary (or fiduciaries) acted prudently. If the fiduciary is successful in proving that he or she acted prudently, the individual should not be held personally liable for a loss incurred by the plan participants. However, depending on the facts, this may be difficult to prove.
Fiduciaries also must be aware of the actions of other fiduciaries of the same plan, since all fiduciaries could be liable for the breaches of their co-fiduciaries.
Employers that sponsor retirement plans and their officers should consider establishing the following best practices in plan governance to limit fiduciary liability:
Effective committees: Select members with relevant skills willing to devote the necessary time; provide sufficient training on roles and responsibilities; hold meetings regularly; distribute meeting agendas in advance; and document decisions carefully in minutes and resolutions.
Written plan policies: Put in place written policies regarding plan investments and administration, including by-laws and a statement of investment policy.
Accountability: Document the roles of each fiduciary in committee charters and ensure that each fiduciary is aware of others who serve as fiduciaries to the same plan.
Rigorous oversight and monitoring: Require an investment or administrative committee to periodically review the performance of other fiduciaries and service providers and to regularly review plan compliance with ERISA.
Effective flow of information: Distribute timely and relevant plan-related information among decision makers, third-party administrators, consultants, legal counsel, and other advisors.
Bonding: Cover fiduciaries who handle plan funds or other plan property by a fidelity bond.
Fiduciary liability insurance/indemnification: Purchase a fiduciary liability insurance policy for fiduciaries for breaches of fiduciary duty and errors and omissions.
Plan fiduciaries also should keep current with new guidance issued by the DOL on fiduciary duties, such as the forthcoming revised definition of "fiduciary" and the recent guidance on required fee disclosures for 401(k) plans.
About the Author:
JOAN A. DISLER is a Member of Epstein Becker Green and Chair of the National Employee Benefits Steering Committee. Ms. Disler, who splits her time in the New York and New Jersey offices of Epstein Becker Green, directs a national practice that provides strategic and practical counsel to the firm's clients on complicated issues relating to employee benefits. Ms. Dilser would like to thank HYUN-JEONG KIM, an Associate in the Employee Benefits practice, for her contributions to the article. For information about Epstein Becker Green, visit www.ebglaw.com.