What's an ERISA fiduciary to do? To mitigate liability risk, that is--a risk that is growing for board members. Here is a primer on ERISA retirement plan oversight.

• Author: Miller, Wayne H.
• Position: FINANCIAL OVERSIGHT

THE EMPLOYEE RETIREMENT INCOME Security Act of 1974 (ERISA)--the federal law that governs retirement plan management--does not articulate specific fiduciary governance processes. The absence of a statutory example of retirement plan governance has resulted in dysfunction in the private retirement plan system in this country.

Over many years, the lack of a fiduciary governance safe harbor allowed service vendors to heavily influence the development of plan sponsor fiduciary behavior. As might be expected, the influence of non-fiduciary service vendors on the evolution of the retirement industry has been counterproductive to the fiduciary intent of serving as a guardian for long-term trust assets.

As a practical matter, dysfunctional fiduciary behavior was irrelevant during much of the 1980s and 1990s. The extended bull market effectively shielded fiduciaries from realizing liability. Events of the past several years, however, have created the perfect storm for retirement plan fiduciaries, including plan administrative committee (PAC) members as well as those members of the board of directors who appoint them. Those board members (often part of the compensation committee) are referred to as "appointing fiduciaries."

Thirty years of case law have made certain duties and responsibilities of an appointing fiduciary very clear. To the extent they fail to perform their oversight duties, they may incur personal financial liability for plan losses attributable to a breach of fiduciary duty by the committee members they appointed. Given their net worth, the prospect of attaching personal liability to those board members makes them tempting targets for plaintiff's counsel. To limit liability exposure for board members with ERISA oversight responsibilities, we recommend the adoption of a systematic approach to ERISA fiduciary governance.

Creation of the promise

A company adopts a retirement plan through a board resolution. Also by resolution, the board (or a committee of the board) appoints a trustee for the plan. Through a subsequent resolution, individuals are appointed to a PAC to manage the day-to-day affairs of the retirement plan. Once a plan is created, the company is typically identified as the plan administrator, as that term is defined in ERISA. Sometimes the PAC itself may be appointed as the plan administrator.

Once appointed, the members of the PAC become fiduciaries and are obligated to abide by ERISA's principles. Their ability to exercise discretion over the plan's administration and the disposition of the plan's assets generates their fiduciary status. Many board members mistakenly believe that once the PAC is appointed, board members' fiduciary duties, responsibilities, and liabilities come to an end. As a matter of law, such an assumption is not accurate.

The appointing fiduciaries have an ongoing duty to monitor the PAC's activity. In essence, they have to assure themselves that the PAC members know what they are supposed to do, have the resources to do what they are supposed to do, and fulfill their fiduciary duties to a "prudent expert" standard of care. The appointing fiduciaries must know what is implied by the prudent expert standard of care in order to determine whether the PAC's activities are appropriate. If the PAC members fail to fulfill their duties to the required standard of care and the plan suffers losses that are tied back to that failure, the liability for those losses can be personal and can fall upon the shoulders of the appointing fiduciaries.

The monitoring duties of the appointing fiduciaries serve as a check and balance in the retirement plan management system. This is why it is so important. Clearly, if substantive monitoring is implemented and documented, a credible defense strategy is more readily constructed. In fact, the very presence of thorough monitoring documentation by the board will tend to deter litigation. After all, the plaintiff's bar would rather pursue companies that are unprepared to defend themselves--i.e., the...