Regulating ERISA Fiduciary Outsourcing

Author:Colleen E. Medill
Position:Robert and Joanne Berkshire Family Professor of Law, University of Nebraska College of Law, and Of Counsel, Koley Jessen P.C., L.L.C.
Pages:505-557
SUMMARY

Pension and welfare benefit plans sponsored by private employers are big business. The sponsorship of these plans is the most heavily tax-subsidized private economic activity in the entire federal budget, with an estimated loss in federal tax revenues due to special tax breaks of over $1.485 trillion for the budget period 2014–2018. In exchange for these special tax breaks, the federal government ... (see full summary)

 
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Regulating ERISA Fiduciary Outsourcing
Colleen E. Medill*
ABSTRACT: Pension and welfare benefit plans sponsored by private
employers are big business. The sponsorship of these plans is the most heavily
tax-subsidized private economic activity in the entire federal budget, with an
estimated loss in federal tax revenues due to special tax breaks of over $1.485
trillion for the budget period 2014–2018. In exchange for these special tax
breaks, the federal government heavily regulates private plans. To cope with
the complexity, employers increasingly hire outside professional fiduciaries to
run their employee benefit plans so that they can concentrate on running their
businesses. Although this outsourcing of plan management and
administrative functions is now widespread, minimal federal regulation
governs these fiduciary outsourcing arrangements. As evidenced by a 2014
report issued by the Department of Labor’s ERISA Advisory Council, both
employers and the professional fiduciary-services industry want and need
more guidance in the form of federal regulation. The need for regulation has
become even more urgent in light of two subsequent developments: the Supreme
Court’s 2015 decision in Tibble v. Edison International, which further
encourages employers to outsource plan asset management functions; and the
Employees Benefit Security Administration’s promulgation of new regulations
in 2016, which expand the universe of professional investment advisors who
are ERISA fiduciaries. This Article explains and analyzes the unresolved
issues that have emerged in this complex area of law, and proposes specific
solutions to regulate fiduciary outsourcing arrangements more effectively.
I. INTRODUCTION ............................................................................. 507
II. ERISA FIDUCIARY RESPONSIBILITIES AND THE SETTLOR
FUNCTION DOCTRINE EXCEPTION ................................................ 514
A. TYPES OF ERISA FIDUCIARIES .................................................. 514
* Robert and Joanne Berkshire Family Professor of Law, University of Nebraska College of
Law, and Of Counsel, Koley Jessen P.C., L.L.C. I would like to thank the following individuals for
reading and providing comments and suggestions on earlier drafts of this Article: Eric Berger;
John Langbein; Norman Stein; and Peter Wiedenbeck. The opinions expressed in this Article ar e
strictly my personal views on this subject, and any errors or omissions remain my responsibility.
In the interest of full disclosure, I previously testified on this topic before the ERISA Advisory
Council. See infra note 17.
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506 IOWA LAW REVIEW [Vol. 102:505
1. Section 402(a)(1) Named Fiduciaries ......................... 514
2. Section 3(16) Plan Administrators .............................. 515
3. Section 403(a) Trustees and Section 3(38) Plan
Investment Managers .................................................... 515
4. Section 3(21)(A) Functional Fiduciaries .................... 515
B. ERISA FIDUCIARY RESPONSIBILITIES ........................................ 516
1. Duties of Loyalty, Prudence and Diversification ......... 518
2. Duty to Follow Plan Document Terms ........................ 519
3. Other Statutory Modifications to Trust Law ............... 520
4. Fiduciary Exculpatory Clauses ...................................... 520
5. Fiduciary Indemnification Using Plan Assets .............. 520
6. Expanded Universe of Fiduciaries ............................... 521
C. THE SETTLOR FUNCTION DOCTRINE ......................................... 522
III. OUTSOURCING FIDUCIARY FUNCTIONS ......................................... 526
A. ERISA’S OUTSOURCING RULES ................................................ 527
1. Outsourcing Fiduciary Functions Under Sections 402
and 405 .......................................................................... 527
2. Fault-Based, Co-Fiduciary Liability Under Section
405(a) ............................................................................ 529
B. COMPLETE OUTSOURCING ....................................................... 531
1. The Policy Benefits and Pitfalls of Complete
Outsourcing ................................................................... 532
2. The Statutory Basis for Complete Outsourcing .......... 533
3. Legislative History ......................................................... 534
4. Statutory Syntax, Agency, and Judicial
Interpretations ............................................................... 537
5. Reexamining the Settlor Function Doctrine ............... 544
IV. REGULATION OF THE PRIVATE MARKET FOR FIDUCIARY
SERVICES ....................................................................................... 547
A. TIBBLE V. EDISON INTERNATIONAL AND THE DUTY TO
MONITOR ............................................................................... 547
B. AREAS FOR ADDITIONAL REGULATION ...................................... 553
1. Complete Outsourcing as an Exculpatory
Technique ...................................................................... 554
2. Safe Harbor Monitoring Duties and the Procedures
for Selecting Service Providers ..................................... 554
3. Model Language for Key Outsourcing Agreement
Terms ............................................................................. 555
4. Regulatory Guidance on Co-Fiduciary Liability
Issues .............................................................................. 556
V. CONCLUSION .................................................................................. 557
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I.INTRODUCTION
Imagine reporting for your first day of work at a new job. You sit down
with the company’s human resources manager to complete a two-inch-tall
stack of paperwork. After 30 minutes, you reach the bottom of the stack,
which consists of a packet labeled “Your Benefits.” The human resources
manager stands up and says, “Congratulations, you are now officially
employed here. I’ll show you to your office.” Surprised, you respond, “But
wait, aren’t we going to go through my company benefits?” “No,” responds
the human resources manager, “the company takes no responsibility
whatsoever for your retirement and healthcare benefits. You’ll have to call the
800 number inside the packet and they will assist you.”
The typical private employer1 wants to operate a business, not an
employee benefit plan.2 But to attract and retain a competitive workforce,
employers must offer competitive compensation packages, which include
providing pension and welfare benefits (e.g., 401(k), profit sharing,
retirement annuity benefits, health care, long-term care, life, and disability
insurance) to their employees.3 Given the complexities of compliance with
the Employee Retirement Income Security Act of 1974 (“ERISA”)4—the
primary federal employment law that regulates employee benefit plans
sponsored by private employers5—it is not surprising that employers have
become increasingly interested in outsourcing the federal-fiduciary
responsibilities associated with plan operation and administration.6 Using
outside professional fiduciaries to perform key plan functions can reduce
1. To simplify the presentation, the Article generally uses a sin gle private employer who
sponsors a single employer plan for its own employees as the governing paradigm for discussion
purposes. See 29 U.S.C. § 1002(41) (2012) (defining single employer plan). Multiemployer plans
and multiple employer plans, which become relevant when interpreting the statute as a whole,
are discussed later in Part III.B.3 of the Article.
2. See ADVISORY COUNCIL ON EMP. WELFARE AND PENSION BENEFIT PLANS, OUTSOURCING
EMPLOYEE BENEFIT PLAN SERVICES 5–6 (2014), https://www.dol.gov/sites/default/files/ebsa/ab
out-ebsa/about-us/erisa-advisory-council/2014ACreport3.pdf [hereinafter ADVISORY COUNCIL
REPORT].
3. According to the Bureau of Labor Statistics, total employer costs for employee
compensation in private industry averaged 69.7% for wages and salaries, and 30.3% for employee
benefits. See Press Release, Bureau of Labor Statistics, Employer Costs for Employee
Compensation—June 2016 (Sept. 8, 2016), http://www.bls.gov/news.release/pdf/ecec.pdf.
4. Employee Retirement Income Security Act of 1974, Pub. L. No. 93–406, 88 Stat. 829
(codified as amended in scattered sections of 26 and 29 U.S.C.).
5. Other sources of federal regulation are the Internal Revenue Code (“IRC ”)
requirements for tax-qualified pension plans that are not duplicated in parts 2 and 3 of Title I of
ERISA, 29 U.S.C. §§ 1051–1058, 1081–1085, and the requirements of the Patient Protection and
Affordable Care Act (“ACA”) for employer-sponsored group health plans that are not already
incorporated by reference in section 715 of ERISA, 29 U.S.C. § 1185(d). Neither the Code nor
the ACA regulate the outsourcing of fiduciary responsibilities for the operation of employee
benefit plans, which is solely regulated by part 4 of Title I of ERISA, 29 U.S.C. §§ 1101–1113.
6. See ADVISORY COUNCIL REPORT, supra note 2, at 5–6.

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