Liability of Fiduciaries Under Erisa
| Publication year | 1992 |
| Pages | 197 |
1992, February, Pg. 197. Liability of Fiduciaries Under ERISA
Congress passed the Employee Retirement Income Security Act ("ERISA") in 1974 to protect participants in employee benefit plans and their beneficiaries by establishing standards of responsibility and obligation for fiduciaries of employee plans.(fn1) ERISA now impacts almost every aspect of employee pension and welfare benefits. Between 1974 and 1989, the number of private pension plans covered by ERISA grew from 34,000 to 870,000, and the pool of covered assets increased from $135 billion to $1.5 trillion. Pension fund assets amounted to more than 17 percent of the U.S. national wealth in 1990. Thus, a sizable proportion of America's workers are affected by ERISA.(fn2)
Partially because of the proliferation of ERISA plans and ERISA's preemption of most state law claims relating to employee pension and welfare benefit plans, litigation under the statute has burgeoned. Moreover, during recessionary times, when companies find it difficult to raise capital by offering securities or borrowing from banks, unscrupulous employers may turn to their employees' benefit or pension plans as sources of ready cash, to use as if they were their own.(fn3)
More than 100 cases are now reported under ERISA. Most have involved either actions to recover benefits in accord with plan documents or actions against ERISA "fiduciaries" for breaches of their duties.(fn4) This article concentrates on discussing the types of roles which make a person a "fiduciary" under ERISA, the duties owed by ERISA fiduciaries, the liabilities which may be incurred for breaches of those duties and various procedural issues.(fn5)
ERISA broadly encompasses "employee welfare benefit plans" and "employee pension benefit plans," including employer-established plans, funds or programs which provide certain benefits to employees (such as, medical, death and disability programs), and programs which provide retirement income to employees or result in deferrals of employee income for periods extending to or beyond the termination of employment.
ERISA usually includes the following employer-sponsored plans: profit-sharing; money purchase pension; self-employment pension programs such as Keoghs, defined benefit and stock bonus plans; and health, disability and accident plans. ERISA explicitly does not apply to government plans; church plans; plans maintained solely to comply with workers' compensation, unemployment compensation or disability insurance laws; plans maintained outside the United States primarily for non-resident aliens; and unfunded excess benefit plans.(fn7) ERISA also does not apply to individual retirement accounts,(fn8) employment contracts,(fn9) bonus plans,(fn10) insurance plans in which the employer involvement is limited,(fn11) and benefits excluded from the definitions of "employee welfare benefit plan" and "employee pension benefit plan" by Department of Labor ("DOL") regulations.(fn12)
A person may be a "fiduciary" under ERISA either because of his or her position or because of the functional authority or responsibility he or she possesses. ERISA § 402(a) requires that the instrument establishing a plan indicate one or more named fiduciaries who are appointed to control, manage and administer the plan. A "named fiduciary" means the fiduciary who is named in the plan instrument by an employer or employee organization. A named fiduciary always owes fiduciary duties, even if he or she declines to exercise control or authority over the plan.(fn13)
ERISA also applies a functional test which makes a person a plan fiduciary "to the extent" that person exercises discretionary authority or control regarding the management of a plan or the disposition of its assets; renders investment advice for a fee or other compensation with respect to the monies or property of the plan, or has authority or responsibility to do so; or has discretionary
In view of the difficulties inherent in determining which duties confer fiduciary status, the DOL has issued regulations in an attempt to clarify circumstances that might be construed as giving rise to fiduciary status, but should not. For instance, attorneys, accountants, actuaries or consultants for plans who merely perform their "usual professional functions" are not plan fiduciaries if they do not also exercise discretionary authority or control regarding the management of the plan, or render investment advice for a fee.(fn16)
Moreover, persons who perform merely "ministerial functions" for a plan---such as calculating service and compensation credits, preparing employee communications materials or required governmental reports, or processing claims---are not fiduciaries so long as they are acting within a framework of policies, interpretations, rules, practices and procedures dictated by others.(fn17) Holding that a plan administrator was not a "fiduciary," in Munoz v. Prudential Insurance Co. of America, the court noted that while the discharge of purely ministerial tasks might require some degree of discretion, that minimal amount of decision-making would not serve as a basis for fiduciary liability.(fn18)
However, the status of "non-fiduciary" is not a complete shield to ERISA liability. For instance, while attorneys who perform only ministerial duties or legal work for ERISA plans should not become fiduciaries merely by virtue of performing those tasks,(fn19) attorneys may be subject to ERISA liability as "parties in interest" if they engage in any prohibited transaction,(fn20) or as knowing participants in a fiduciary's breach.(fn21) The potential ERISA liability of non-fiduciaries is discussed below.
In ERISA § 404, Congress codified strict standards of duty for ERISA fiduciaries. Plan fiduciaries must discharge their duties solely in the interest of participants and beneficiaries. They must also act:
1) for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable plan administration expenses;
2) with the care, skill, prudence and diligence that a prudent man would use in conducting such an enterprise;
3) to diversify plan investments unless it is clearly prudent not to do so; and
Duty of Undivided Loyalty4) in accordance with the plan documents, insofar as they are consistent with ERISA.(fn22)
As noted above, ERISA fiduciaries must act solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits and paying reasonable expenses. If fiduciaries place their own interests ahead of the plan's or participants' welfare, the fiduciaries violate the duty of loyalty.(fn23) Fiduciaries also may violate this duty by taking action to benefit a third party, even if the fiduciaries do not personally benefit,(fn24) or by favoring one group of participants over another group.(fn25) Nonetheless, in appropriate circumstances, fiduciaries may act in a manner that benefits both the plan and the employer or the plan fiduciaries.(fn26)
This duty of undivided loyalty is supplemented by the prohibited transaction rules contained in ERISA § 406, which mandate that fiduciaries may not enter into transactions if they know or should know that the transaction constitutes:
1) a direct or indirect sale, exchange or leasing of property, extension of credit, furnishing of goods, services or facilities between a plan and a party in interest; or
2) a transfer of any plan assets to or use of plan assets by or for the benefit of a party in interest; or
3) an acquisition on behalf of the plan of any employer securities or real property in violation of the limitations contained in 29 U.S.C. § 1107.(fn27)
The term "party in interest" includes any fiduciary, counsel, employee or person providing services to a plan. A party in interest also includes an employer or employee organization covered by the plan, as well as a person, corporation, partnership, trust or estate which is a direct or indirect owner of 50 percent or more of: (1) the combined voting power or the total value of shares of all classes of stock of a corporation; (2) the capital or profits interest of a partnership; or (3) the beneficial interest of a trust or unincorporated enterprise. Finally, a party in interest includes a relative of any of the aforesaid persons or entities and an employee, officer, director or a 10 percent or more shareholder of any of the aforesaid persons or entities.(fn28)
By explicitly prohibiting those structural conflicts which provided the greatest opportunity for fiduciary self-dealing, Congress broadened the common law of trusts. In situations involving transactions with third parties, where the common law would require proof that the fiduciary's relationship with the third party did or might influence the fiduciary's best judgment, ERISA simply deems certain persons to have an unsavory influence. Congress eliminated the burden of showing that the fiduciary was actually influenced to the detriment of the plan.(fn29)
ERISA § 406(a) prohibits fiduciaries from entering into a transaction which they "know or should know" is a transaction with the party in interest.(fn30) Fiduciaries must act prudently in determining whether a "party in interest" relationship exists prior to entering into a transaction, although...
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