ERISA Statutory Overview and Fiduciary Duties
• The Employee Retirement Income Security Act (“ERISA”) was enacted into law in 1974. The act is codified as part of Title 29 of the United States Code. ERISA enforces the administration of retirement and benefit plans.
• ERISA does not require that an employer provide a benefit plan but if an employer provides benefits the employer must comply with ERISA. The requirementsinclude preparing a written plan document and filing the plan document description and annual reports with the Department of Labor.
The ERISA Plan And General Requirements For Plan Fiduciaries
• Employee benefit plans include pension plans and welfare plans. An employee pension benefit plan (e.g., retirement and §401(k) plans) means any plan, fund or program which provides retirement income to employees or the deferral of income for a period extending to the termination of employment. The term “welfare plan” means a plan which provides benefits such as healthcare benefits or long-term disability plans. These terms are defined in 29 U.S.C. §1002. Definitions.• Every benefit plan must be established and maintained pursuant to a written instrument. The plan must name one or more fiduciaries. ERISA allows but does not require that a person serve in more than one fiduciary capacity. The named fiduciary may employ one or more persons to render advice with regard to any responsibility such fiduciary has under the plan such as an investment manager and a trustee. The person who is named as a fiduciary with respect to the control or management of assets of the plan may appoint an investment manager. 29 U.S.C. §1102. Establishment of Plan.• An investment manager is a person who has the power to manage, acquire or dispose of plan assets, is registered as an investment advisor under the Investment Advisors Act, and who has acknowledged in writing that he is a fiduciary with respect to the plan. 29 U.S.C. §1002(38).
Who Is A Fiduciary
• ERISA requires that the Plan identify one or more named fiduciaries in the Plan document. The named fiduciaries are typically plan administrators and plan trustees. The named fiduciary has authority to control and manage the operation and administration of the Plan.• A person may also be considered a fiduciary based on the conduct and authority of the person. ERISA, in fact, defines fiduciaries based on the functions which the person performs with respect to the Plan. ERISA provides that a person is a fiduciary with respect to the Plan to the extent that the person exercises any discretionary authority or control with respect to management of the Plan or the disposition of assets. ERISA also states that an individual that renders investment advice to a Plan for a fee or individuals that have discretionary authority or responsibility for administrating a Plan are fiduciaries. 29 U.S.C. §1002 (21)(A).• A person can perform both fiduciary and non-fiduciary functions. Thus, a person may be a fiduciary with respect to certain functions but may be entitled to act in their own interest for other functions for which they are not considered a fiduciary.• ERISA provides that named fiduciaries may limit their fiduciary duties by properly allocating some or all of their duties under the Plan which also limits the named fiduciaries’ liability for the responsibilities delegated. 29 U.S.C. §1105 (c).
Persons Not Considered Fiduciaries
• The Department of Labor regulations state that individuals and entities which provide services to a Plan or render professional advice are not considered fiduciaries unless they have the discretionary authority or responsibility with respect to a Plan or its assets. The service providers which are generally not considered fiduciaries are actuaries, attorneys, accountants and consultants (other than investment advisors). 29 C.F.R. §2509. 75.5.
The Duties Of A Fiduciary
• ERISA sets forth four general rules which a fiduciary is required to adhere to when acting as a fiduciary. 29 U.S.C. §1104. Fiduciary Duties.• Exclusive Benefit Rule – The fiduciary must discharge duties with respect to the Plan for the exclusive benefit of the participant and their beneficiaries. 29 U.S.C. §1104 (a)(1)(A).• Prudent Man Rule – A fiduciary must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity” would act. This rule is derived from the common law of trusts. This is an objective standard based upon how a person with experience and knowledge of a certain area would act in a given situation. If a fiduciary lacks the expertise for a certain area then the fiduciary must obtain expert help. 29 U.S.C. §1104 (a)(1)(B).• Diversification Rule – A fiduciary must diversify investments in order to minimize risk of loss unless it would be considered prudent to not diversify investments. 29 U.S.C. §1104 (a)(1)(C).• Plan Document Rule – A fiduciary must act in accordance with the Plan documents but only to the extent that the Plan is consistent with ERISA requirements. Thus, a fiduciary must know and act in accordance with the Plan and must have sufficient knowledge of the ERISA requirements. 28 U.S.C. §1104 (a)(1)(D).• Prohibited Transactions – In addition to the four general fiduciary rules, ERISA contains a “prohibited transaction” rule. This rule prohibits specific types of transactions. The purpose of the rule is to prohibit transactions which offer a high potential for insider abuse. The rules fall into three categories restricting transactions between a Plan and participant in interest; transactions between a Plan and a fiduciary; and the transfer of property to a Plan by a party in interest. 29 U.S.C. §1106. Prohibited transactions. It should also be noted that ERISA provides that certain transactions such as loans to participants or beneficiaries are exempt from the prohibited transaction rule. 29 U.S.C. §1108. Exemptions from Prohibited Transactions.
Liability For Fiduciary Duty And Insurance
• ERISA imposes personal liability on a fiduciary who breaches fiduciary duties. If there is a loss caused by a breach of fiduciary duty, the fiduciary must make the Plan whole by restoring any losses caused by the breach and by restoring to the Plan any profits which were made through the use of Plan assets. 29 U.S.C. §1109. Liability for Breach of Fiduciary Duty.• ERISA, although providing that a provision of a Plan that attempts to relieve a fiduciary from fiduciary duties is void, does provide that a fiduciary of a Plan can maintain fiduciary liability insurance coverage for the Plan and all of the fiduciaries. 29 U.S.C. §1110. Exculpatory Provisions; Insurance.
ERISA Civil Enforcement Scheme
• ERISA provides that civil actions to obtain appropriate relief for a breach of fiduciary duty may be brought by a participant, a beneficiary, a fiduciary or the Secretary of Labor. 29 U.S.C. §1132 (a). Civil Enforcement.• The statute provides that civil actions may be brought to recover benefits due under the Plan, to enforce rights under the terms of the Plan or clarify rights to future benefits under the terms of the Plan.• The statute provides that a participant, beneficiary or fiduciary may bring a civil action to enjoin any practice which violates any provision of ERISA or the terms of the Plan.• Attorney fees and costs may be awarded to the prevailing party. 29 U.S.C. §1132 (g)(1).