I am frequently asked to address boards of trustees or investment committees of plans about ERISA fiduciary problems facing a retirement or health plan. Many times, the problem involves an event or transaction involving trustee or fiduciary activity, such as an investment decision where the plan suffered a loss.
In these kinds of situations, I always try to first get an assessment of where the boards or committees are in terms of their own personal liability as fiduciaries. I focus on two major questions: Are you indemnified for a fiduciary breach? Do you have adequate fiduciary liability insurance coverage?
The beginning of the year is a good time to examine or assess your indemnification and insurance coverage. It is especially appropriate to focus on indemnification for a couple of reasons. First, it appears that the position recently taken by the Labor Department, and adopted by certain federal courts, has put into question the ability of plans, and arguably companies, to indemnify plan fiduciaries in instances where there has been an allegation of fiduciary breach. In my view, this position runs contrary to what the Labor Department first opined in 1977—that is, that plan fiduciaries generally can be indemnified by a plan and their attorney’s fees can be advanced in their defense as long as there has not been a final judgment by a court that a breach actually occurred, and provided that the indemnified party has agreed to an appropriate undertaking to repay the advancement in the event of a court finding of a breach. This is what basically has been required for indemnification for the past 30 years.
If the federal government wants the very best people to serve as fiduciaries for plans, then the government needs to support a policy that provides strong protection for plan fiduciaries absent a finding of a fiduciary breach. Anything short of this will steer most qualified fiduciaries away from service.
In one recent 9th Circuit decision, the court actually admitted that prohibiting the advancement of attorneys’ fees created difficult hardships for fiduciaries who are trying to defend themselves. Nevertheless, the court concluded that advancement was precluded and the defendant trustees would have to fend for themselves. Having recognized but ignored the public policy interest in providing a fair level of protection for plan fiduciaries, the government and courts now are examining ways to undermine more than 30 years of legal precedent supporting a fiduciary’s right to indemnification and advancement of fees from a plan.
Moreover, it gets worse. We had always thought that, while the provision of indemnification by a plan is tricky, primarily because “plan assets” are being used to defend fiduciaries of plans, indemnification using corporate funds would not be subject to the same level of ERISA scrutiny. However, in some recent cases, courts have been willing to go much further and actually impose fiduciary responsibility on decisions not directly involving plan assets. In that 9th Circuit decision, which involved an ESOP, the appeals court said that, while decisions relating to corporate matters generally do not fall within ERISA’s purview, where an ESOP fiduciary also serves as a corporate officer or director, “imposing ERISA duties on business decisions” does not “seem unworkable.”
Well, it is not only unworkable, it is scary. In this case, these decisions were admittedly corporate decisions, not plan decisions. Nevertheless, because the corporate decisions could affect the value of the ESOP, the court was comfortable in subjecting them to ERISA scrutiny and, worse yet, precluding the company from providing advancement of defense costs for plan fiduciaries.
In summary, I am worried that, in cases involving a Labor Department investigation and the like, the agency or plaintiffs around the country will now try to cut off the payment of legal fees for plan fiduciaries from a company’s assets because such payment would adversely affect, albeit indirectly, the financial strength of the plan. If other courts jump on this bandwagon, continued reliance on corporate indemnification by fiduciary members of plan boards of trustees or investment committees will be undermined.
Stephen M. Saxon is a Partner with the Washington-based Groom Law Group. Groom is one of the preeminent employee benefits firms in the country. Steve and his colleagues have worked on virtually every major legislative and regulatory initiative affecting employee benefits since the enactment of ERISA.