EBSA Issues Directed Trustee Responsibility Guidance

December 17, 2004 (PLANSPONSOR.com) - Federal regulators on Friday formally declared that directed trustees under the Employee Retirement Income Security Act (ERISA) are to be considered fiduciaries and are required to act prudently.

>The pronouncement came from the US Department of Labor’s Employee Benefits Security Administration (EBSA), which released  Field Assistance Bulletin (FAB) 2004-03 providing guidance to field investigators on the responsibilities of ERISA directed trustees.   The FAB was a response to  Groom Law Group Chartered’s advisory opinion request filed by Stephen M. Saxon and Jon W. Breyfogle, on behalf of a dozen banks and other financial institutions early in 2004.    The request was endorsed by the American Bankers Association.  

Enron Brief

>As they did in    a legal brief the DoL filed in the Enron case, DoL officials said in the document released Friday that a directed trustee not only must carry out its duties prudently, they also must act solely in the interest of the participants and beneficiaries of employee benefit plans.

>In the Enron brief, the DoL made assertions about the charges leveled in a suit over Enron’s giant retirement plan losses against Northern Trust, which was both trustee and recordkeeper for the Enron plan. The Northern Trust charges, DoL wrote, were “sufficient to state a claim that Northern Trust had a duty to act, even if it was acting as a ‘directed trustee’ in this matter, as it claims” (See    Divining Line ).

>The Field Assistance Bulletin also makes clear that the named fiduciary, not the directed trustee, is primarily responsible for ensuring the prudence of plan investment decisions.   A directed trustee is only required to question the directing fiduciary’s instructions regarding transactions involving publicly traded securities in rare circumstances, the DoL said.

Narrower Duties

>Acknowledging that the duties of a directed trustee under section 403(a)(1) are significantly narrower than the duties generally ascribed to a discretionary trustee under common law trust principles, the FAB goes on to caution that, “Under section 403(a)(1), a directed trustee is subject to proper directions of a named fiduciary. For purposes of section 403(a)(1), a direction is proper only if the direction is “made in accordance with the terms of the plan” and “not contrary to the Act [ERISA].” Accordingly, when a directed trustee knows or should know (emphasis added) that a direction from a named fiduciary is not made in accordance with the terms of the plan or is contrary to ERISA, the directed trustee may not, consistent with its fiduciary responsibilities, follow the direction.”  The “should have known” language appeared in the Enron brief, and has been challenged by the American Bankers Association as being drawn from general trust law, rather than ERISA.

>The FAB does, however, note that a directed trustee may rely on the representations of the directing fiduciary unless the directed trustee knows that the representations are false. The bulletin specifically addresses the responsibilities of a directed trustee in deciding whether a direction is “proper” – consistent with the terms of the plan and not contrary to ERISA. For example, DoL stated that information provided to a named fiduciary concerning the prudence of a direction is not investment advice for purposes of ERISA §3(21)(A)(ii). Similarly, if a named fiduciary changes a direction in response to a directed trustee’s inquiries or information, the directed trustee’s fiduciary responsibility with respect to the changed direction remains governed by section 403(a)(1). The directed trustee does not become primarily responsible for the prudence of the direction, DoL said.

>According to the FAB, a directed trustee does not (at least in the view of the DOL) have an independent obligation to determine the prudence of every transaction, nor do they have an obligation to duplicate or second-guess the work of the plan fiduciaries that have discretionary authority over themanagement of plan assets – or a direct obligation to determine the prudence of a transaction. 

>The FAB notes that the primary circumstance under which such an obligation could arise is when the directed trustee has access to “material non-public information regarding a security.”   In those circumstances, the FAB says that before following a direction that would be affected by that information, the directed trustee would have a “duty to inquire about the named fiduciary’s knowledge and consideration of the information with respect to the direction.”   Specifically noted as an example was a situation where the directed trustee has non-public information indicating that a company’s public financial statements contain material misrepresentations that significantly inflate the company’s earnings.   A circumstance in which the FAB says the “trustee could not simply follow a direction to purchase that company’s stock at an artificially inflated price.”

Non-Public Information

>When a directed trustee has non-public information regarding a security that is necessary for a prudent decision by the directing plan fiduciary, the bulletin sets out that the directed trustee has a duty to inquire about the named fiduciary’s knowledge and consideration of the information.

“Particularly in the context of purchasing, selling or holding publicly traded securities on a generally recognized market, the trustee may follow the named fiduciary’s directions absent extraordinary circumstances,” the DOL said in the bulletin. The document provides that a directed trustee may have to question directions involving the purchase or holding of a security where there are “clear and compelling public indicators” that call into question the issuer’s viability as a going concern.  

>All in all, the FAB concedes that a directed trustees “…responsibilities are significantly limited under the statute,” but cautions that the directed trustee “…is a fiduciary under ERISA and must exercise its duties prudently and solely in the interest of the plan participants and beneficiaries.”   Directed trustees involved with company stock will, however, likely draw comfort from the conclusion in the FAB that says, “particularly in the context of purchasing, selling or holding publicly traded securities on a generally recognized market, the trustee may follow the named fiduciary’s directions”, absent the “extraordinary circumstance” outlined in the FAB.

>In response to the FAB, Groom’s Saxon said in a statement, “We appreciate the Department’s guidance and are still analyzing it.  The guidance did not go as far as we would have liked, and certainly we would never concede that a directed trustee is a fiduciary.  The case law here is not clear.  Notwithstanding this,  the FAB sends a message, loud and clear, to the plaintiffs’ bar that ordinary directed trustees are no longer fair game for class action lawsuits.  The Department agrees with us that directed trustees who by contract have no investment responsibilities will not be liable for losses that arise simply because of a drop in stock prices.  That game is over,” Saxon added.