PLANSPONSOR Roadmap: Understanding Plan Sponsors’ Fiduciary Duties

The fiduciary duty of loyalty reminds Leah Sylvester, executive partner and president of retirement plans at Shepherd Financial, of the “golden rule” many learned in kindergarten: “do unto others as you would have done unto you.”

Working in the best interests of participants was the best piece of advice speakers could give to plan sponsors and other fiduciaries at the first session of PLANSPONSOR’s Roadmap Livestream Series: Fiduciary 101, “Understanding Plan Sponsors’ Fiduciary Duties,” on February 11.

“The Employee Retirement Income Security Act, or ERISA, was passed into law in 1974 and it is the governing document for employer-sponsored retirement plans,” said Rebecca Moore, moderator for the session. “However, subsequent legislation and regulations have changed certain rules—and along with various litigation, have given consideration to new processes for implementing the roles. Whether you’re new to the plan sponsor role or not, it is important to review what is required of you” as a fiduciary.

A recording of the full webinar is available here.

Who is a Fiduciary to a Retirement Plan?

R. Bradford Huss, director at employee benefits law firm Trucker Huss, said a person is a fiduciary under ERISA if they:

• “Exercise any discretionary authority or discretionary control respecting management of the plan;
• Exercise any authority or control respecting management or disposition of plan assets;
• Render investment advice for a fee or other compensation, direct or indirect, with respect to any plan assets, or has any authority or responsibility to do so; or
• Have any discretionary authority or responsibility in the administration of the plan.”

While someone may be an “inherent” fiduciary, by nature of serving as the trustee of a plan, an ERISA-defined plan “administrator” or an investment or administrative committee member, they “can be a fiduciary whether [they] have a fancy title or not,” Huss explained.

Sylvester added that some actions taken by employers are “settlor decisions,” meaning they are business decisions only and neither implicate the fiduciary status of the employer nor subject the employer to fiduciary liability. Some settlor decisions include establishing a plan, amending a plan and terminating a plan. The actions taken to implement or carry out a decision, however, such as implementing a loan provision into a plan—which involves discretion—are subject to the fiduciary standards of ERISA.

Duties Of Loyalty, Prudence

As part of the duty of loyalty, a fiduciary under ERISA shall “discharge their duties with respect to a plan solely in the interest of the participants and beneficiaries,” Huss said.

The duty of prudence requires a fiduciary to act “‘with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in the capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims,’” Huss added, citing ERISA Section 1104. That duty includes diversifying the investments of a plan to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. A fiduciary must act in accordance with the “documents and instruments governing the plan insofar as they are consistent with the provisions of ERISA,” Huss explained.

When evaluating whether a fiduciary breached the duty of prudence, a court will evaluate not only the “merits of the transaction” but also the “thoroughness of the investigation into the merits of the transaction,” Huss said. Donovan v. Bierwirth, heard by the U.S. Court of Appeals for the Second Circuit, held that the duties under the ERISA prudent-person rule are “the highest known to law.”

“The court is going to look at how you arrived at your decision and whether it was reasonable at the time you made the decision,” Huss added. The court will not “view it with hindsight from years later.”

In sum, Huss recommended that plan fiduciaries:

• Establish a prudent process for selecting investment options and service providers;
• Ensure that fees paid by the plan and other expenses of the plan are reasonable in light of the level and quality of services provided;
• Select investment options that are prudent and adequately diversified;
• Monitor investment options and service providers once selected to ensure that they continue to be appropriate choices; and
• Comply with the ongoing duty to monitor.

Breach of Duty

“ERISA is a participant-friendly statute,” Huss said. “It was enacted to protect plan participants, and it has strict rules on liability.”

Under Section 409 of ERISA, anyone in breach of their fiduciary duty can be personally liable to make good to the plan any losses to the plan from the breach, Huss said. The fiduciary can also be liable to restore to the plan any profits the fiduciary has made using plan assets.

To remain in compliance, a fiduciary may not engage in what ERISA calls “prohibited transactions,” according to Huss. These transactions include:

• A sale or exchange, leasing, of any property between the plan and a party in interest;
• A lending of money or other extension of credit between the plan and a party in interest: meaning it is crucial to deposit money deferred from salaries into plan trusts as soon as administratively feasible;
• The furnishing of goods, services or facilities between the plan and a party in interest;
• A transfer to, or use by or for the benefit of a party in interest, any assets of the plan; and
• The acquisition on behalf of the plan, of any employer security of employer real property.

In addition, a fiduciary cannot engage in self-dealing prohibited transactions, which Huss equates to meaning, “no kickbacks.”

As general best practices, Sylvester recommended fiduciaries familiarize themselves with their plan document and work with a professional when a breach is understood to have occurred.

“A plan document is not the easiest read in the world, [but] it’s not the most difficult,” Sylvester said. “I encourage all committee members to read the document at least one time. If you don’t understand the terms of your plan, you’re never going to know or realize when you’re in breach.”

Liability Insurance and Indemnification

While the potential consequences of serving as a fiduciary might seem daunting, there are ways both employers and employees can find relief, according to Huss. ERISA allows a plan fiduciary to purchase insurance for their own account to protect the fiduciary against liability for breaches of fiduciary duty under ERISA and to pay the costs of defending an action brought against the fiduciary, Huss said. The plan sponsor may also purchase fiduciary liability insurance to cover their plan fiduciaries.

Huss said the Department of Labor has also approved indemnification agreements for fiduciaries, which allow plan sponsors to satisfy any liability incurred by a plan fiduciary so long as the fiduciary maintains their full responsibility and liability for the breach of duty.

Checklists for Success

Huss advised fiduciaries to “act in the best interest of plan participants and have a good process.” His checklist also includes:

• “Understand your duties;
• Receive fiduciary training;
• Actively fulfill your duties at regular intervals;
• Employ prudent processes;
• Know your plan documents;
• Engage experts when you are not qualified; and
• Document, document, document.”

Sylvester said the checklist continues to grow every year and helps fiduciaries make sure they do not miss anything important, especially in the case of an audit from the Department of Labor.