Most blog entries focus on new developments or recent legislation. This one’s a bit different. Its subject matter, fiduciary responsibility, is as old as ERISA itself. In today’s environment of increased litigation risks for plans, it’s critically important to dust off these rules and review these fundamental obligations applicable to all ERISA plan fiduciaries.
ERISA imposes a few specific duties on fiduciaries:
- Loyalty (also called the “exclusive benefit” rule) – the duty to act solely for plan participants and beneficiaries
- Prudence – the obligation to act with the care, skill, and diligence of a prudent person
- Diversification – the requirement to offer a diversified menu of plan investments
- Plan documents – fiduciaries must comply with the terms of the applicable plan document (unless it conflicts with applicable law)
Of these duties, prudence (or, more specifically, the allegation that fiduciaries acted imprudently) has been the center of most cases involving plan fiduciaries. Typically, the claim alleges the fiduciary acted imprudently in selecting plan investment options that were too expensive relative to other comparable investments.
These cases are tough on fiduciaries because, at their core, they allege the fiduciary failed the plan participants (the fact that the fiduciary could be personally liable for the breach also contributes). Because plan fiduciaries are usually employees themselves, this often puts them in an adversarial position with people they see and interact with on a daily basis, which can put a strain on professional and personal relationships.
Few fiduciaries set out to intentionally violate the duties imposed by ERISA. More often, these cases involve neglect. For years, those responsible for plans paid little more than lip service to creating a good fiduciary process and even less attention to documenting that process. Few retirement committees had up-to-date charters. Even less had proper delegations of authority. Some didn’t even have investment policy statements. In today’s environment, this is a recipe for disaster. Law firms representing plan employee plan participants have figured out how to make money in ERISA litigation. And, it’s not just the boutique law firms; traditional and larger employment law firms are now pursuing these claims. It’s now common to see requests for plan documents and broad allegations of fiduciary breach in the plaintiff firm’s initial demand letter. Excessive fee cases, which fundamentally involve allegations of fiduciary breach, are being filed on a daily basis. Many plaintiffs’ firms have developed sophisticated approaches to these cases. As a result, underprepared plans have little chance of defending themselves.
When we advise clients on this issue, we focus on process and documentation. Fiduciaries must be clearly identified and have defined roles. The individuals filling these roles must be qualified and should have periodic fiduciary training. Plan committees must have correct and up-to-date charters, delegations, indemnification agreements and meeting minutes. Fiduciaries must have a good process for making decisions in place and must document as much of it as possible. This is a fiduciary’s best defense to an allegation of breach.