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Fiduciaries Can Avoid Becoming Defendants 
 

6/28/2010  By Stephen Miller 
 
Sherwin S. Kaplan of Nixon Peabody LLP.


SAN DIEGO—Often, HR professionals misunderstand their responsibilities as benefit plan fiduciaries with legal obligations under the Employee Retirement Income Security Act (ERISA), or don’t even realize that they are fiduciaries. Failing to exercise fiduciary responsibilities can result in government prosecution and employee lawsuits. But ultimately, it means benefit plans are not being run as well as they should be.

A timely reminder on “Fiduciary Issues and How to Avoid Becoming a Defendant” was provided by Sherwin S. Kaplan, a 23-year veteran of the U.S. Department of Labor who practices law with Nixon Peabody LLP in Washington, D.C. During a June 28, 2010 Society for Human Resource Management (SHRM) Annual Conference session held here Kaplan noted that ERISA applies to retirement, health, disability, severance, education “and virtually all employer-provided benefit plans.” For each of these, ERISA requires a written plan document with named fiduciaries (although not all fiduciaries must be named), a summary plan description (SDP) that explains the benefits, and an administrative appeals procedure for those denied benefits. “If you don’t have these, you’re in violation of ERISA,” Kaplan said. “Not having them does not allow you to claim you’re not an ERISA plan.”

Who Is a Fiduciary?

Under ERISA, anyone who has discretionary authority or responsibility for the administration of the plan is a fiduciary, as is anyone who exercises discretionary authority or control over the management of the plan or its assets. That covers most HR benefit managers, as well as HR and non-HR employees who serve on retirement or health plan oversight committees. And fiduciaries include anyone who receives a fee for rendering investment advice regarding plan assets. However, individuals performing “ministerial” or secretarial tasks, as opposed to “discretionary” acts requiring judgments, are not fiduciaries.

Fiduciary duties include:

  • The exclusive purpose rule, which requires fiduciaries to act solely in the interest of plan participants and their beneficiaries. For example, plan assets can only be used to pay benefits and defray reasonable costs of plan administration. Moreover, participant fees should be reasonable. “That doesn’t mean the cheapest, but it does require you to document that fees are not excessive for the services received,” Kaplan said.

  • The prudence standard, which requires providing “prudent” management. Because this standard requires familiarity with the plan and its benefits, it is sometimes referred to as the “prudent expert” standard.

In addition, ERISA requires fiduciaries to follow the terms of the plan (unless it would otherwise violate ERISA to do so), avoid prohibited or conflicted transactions, and ensure diversification of plan assets (unless it’s prudent not to do so). “Prudence is a process, not a result,” Kaplan said. “It’s the process, not your decisions, that will be judged” if things go wrong, which is why documentation is so important.

Protecting Fiduciaries

Fiduciaries are personally liable for violating ERISA’s requirements, and can be prosecuted by the Labor Department or sued by plan participants or their beneficiaries. If found guilty, fiduciaries can face civil fines and penalties—or even jail. That’s why most employers provide plan fiduciaries with liability insurance that covers legal defense costs or agree to indemnify them if they are held liable (a commitment that only lasts as long as the company, as Enron’s fiduciaries discovered). 

But the best practice is to avoid infractions that could subject a fiduciary to liability. Kaplan summarized the “big three” ERISA requirements as:

  • Adopt good written procedures and follow them.

  • Document all significant decision-making with meeting minutes and filed memoranda.

  • Monitor the implementation of your decisions.

“Remember, serving as an ERISA fiduciary is not an honorary position,” Kaplan advised. “It is not a reward for past service. It requires time and attention to ensure compliance with all plan documents.”

A few other tips:

  • Always be able to explain why you did or did not take any significant action.

  • Conduct a formal bidding process for major service providers, and ensure all service commitments are included in the agreements.

  • Monitor service providers to ensure they live up to all contractual provisions.

  • Make sure all individuals communicating with participants on behalf of the plan are providing accurate information.

“Giving inaccurate information to participants is a major source of lawsuits,” Kaplan noted. “If communications aren’t accurate, correct them—and do it sooner rather than later.”

And monitor compliance with new laws and regulations. Regarding health care reform, “know if your provider is prepared to adopt new requirements as they become known,” Kaplan said. And be mindful about whether there is participant dissatisfaction.

“If there is a problem, fix it before you are forced to fix it,” he advised.

Stephen Miller is an online editor/manager for SHRM.  

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