UNTRUSTWORTHY: ERISA'S ERODED FIDUCIARY LAW.

• Author: Wiedenbeck, Peter J.

TABLE OF CONTENTS Introduction 1010 I. TAMING ERISA FIDUCIARY LAW 1012 A. The Fischel-Langbein Proposal 1018 B. The muir-Stein Exposition 1024 II. EMPLOYEE BENEFITS AS WEAK PROPERTY 1033 III. PROPERTY DEFINITION: AMENDMENT AUTHORITY 1037 A. Pension Benefits 1040 B. Welfare Benefits 1044 IV. PROPERTY REDEFINITION BY INTERPRETATION: THE NEW GRATUITY THEORY 1051 A. Employer Primacy 1052 B. "[Extra-] Ordinary Contract Principles" 1058 V. PROPERTY PROTECTION: EXCULPATION 1063 A. Express Exculpation 1063 B. Implicit Exculpation 1070 1. Loyalty 1074 2. Care 1085 VI. FORTIFYING EMPLOYEE BENEFIT PROPERTY 1088 CONCLUSION 1093 INTRODUCTION

ERISA, the Employee Retirement Income Security Act of 1974, (1) is often hailed as a landmark achievement in labor and social welfare legislation. (2) Congress declared as its central goal "to protect ... the interests of participants in employee benefit plans and their beneficiaries." (3) One prominent strategy to that end was the imposition of broadly applicable, stringent federal fiduciary standards. This trust law aspect of ERISA rapidly rose to doctrinal and rhetorical prominence, even as the force of ERISA fiduciary law slowly corroded.

The scope and force of fiduciary principles in the employee benefit context is an area of continuing controversy and a focus of ongoing scholarly debate. (4) Originally viewed as a fearsome threat to longstanding business practices, most of the details of ERISA's fiduciary regime were left to be worked out by the federal courts in civil enforcement actions. Distinguished scholars advocated flexibility in the application of ERISA's fiduciary duties, allowing courts to take account of the sponsoring employer's interests in employee benefit programs to maximize the joint welfare of the employer and covered employees. (5) Federal courts did not follow that path. Instead, they developed an alternative restraint: categorically excluding plan design decisions (adoption, amendment, or termination of a plan--so-called "settlor functions") from the definition of fiduciary actions. This settlor/fiduciary distinction, or settlor function doctrine, is now widely recognized as a central tenet of employee benefit law. (6)

This Article relates the settlor function doctrine to ERISA's accrued benefit anti-reduction rule, and shows that many troubling results produced by the settlor function doctrine can be understood as staking out the boundaries of a worker's limited "property" interest in employee benefits. That property interest has two dimensions: breadth and depth. The settlor function doctrine, by restricting the range of application of ERISA's fiduciary regime, limits the breadth of property. The thesis of this Article is that case law developments have also covertly limited the intensity or strictness of ERISA fiduciary duties within their limited domain of application. (7) Property in employee benefits is weak property.

The weaknesses of pension and welfare benefit property are traceable to several sources in addition to the settlor function doctrine and ERISA's minimal restraints on plan amendment. Employee benefit plans that the employer unilaterally establishes are interpreted to carry out the employer's intent. (8) Plans that are collectively bargained, in contrast, are read in light of contract norms, but the Supreme Court's guidance on plan interpretation skews the inquiry to favor the employer. (9) These interpretive doctrines sometimes operate to retrospectively curb or redefine employees' interests in benefits.

The courts apply the limited abuse-of-discretion standard of review to fiduciary decisions if the plan grants the fiduciary discretion to construe its terms, as virtually all plans now do. (10) Even if the fiduciary is a company insider acting under a conflict of interest, her decisions are accorded considerable deference--effectively given a presumption of good faith and regularity. The practical result is a species of implicit exculpation of employer-regarding decisions, notwithstanding ERISA's express override of plan provisions that would relax fiduciary obligations. This crypto-exculpation teaches that the new property in employee benefits is weak property, both because it is narrowly defined and loosely enforced. (11)

The emergence of weak property in employee benefits--the quiet coup in ERISA fiduciary law--rebalances competing legislative policies. It accords greater weight to employer autonomy and the related desire to promote voluntary plan sponsorship, and increases the vulnerability of employees' anticipated health and retirement benefits. Without undertaking to identify the optimal trade-off, this Article briefly addresses the mechanisms by which workers' interest in pension and welfare benefits could be reinforced. (12) Whether or not such a strengthening is pursued, the essential fragility of purportedly robust federal protections is labor's vital lesson.

1. TAMING ERISA FIDUCIARY LAW

   Comprehensive private pension reform legislation underwent a decade-long gestation. (13) Strict federal fiduciary obligations applicable to both pension and welfare plans became an early component of the package. (14) Support for enhanced fiduciary oversight was widespread, (15) including among business groups and their representatives. (16) Once ERISA emerged from the legislative arena, however, the broad scope and apparently unyielding force of the responsibilities imposed on benefit plan administrators aroused concern. Congress, it seemed, had crafted an alarmingly strict and expansive version of trust law that threatened to unbalance ordinary operations of employee benefit plans. (17) Benefit specialists complained of "overkill" and looked for ways to rein in potentially far-reaching and disruptive applications of ERISA's fiduciary responsibility regime. (18)

   ERISA's fiduciary rules were derived from traditional trust law, modified to adapt it to the mission of controlling mismanagement and abuse of employee benefit programs. (19) A trustee may be subject to exacting duties of loyalty and care backed by personal liability in the event of breach, but that exposure is readily sidestepped. The intended trustee can decline appointment, or can agree to serve only if the settlor relaxes the force of fiduciary obligations by including exculpatory clauses in the trust instrument. (20) Under ERISA, in contrast, robust fiduciary responsibility appears inescapable. Congress adopted a functional definition of fiduciary so that all benefit plan decision makers, asset custodians, and paid investment advisors can be called to account--not just the legal owner of the fund. (21) Hence actions and authority, rather than formal conveyancing and consent, establish who owes duties to plan participants. And by voiding exculpatory clauses, Congress prohibited employee benefit plan sponsors from lowering ERISA's prescribed standards of acceptable fiduciary conduct. (22) Compared to the status quo ante, ERISA apparently created an entirely new high-risk environment for pension and welfare benefit plan sponsors and service providers, a regime that imposed broadly applicable uncompromising obligations.

   Early administrative action calmed industry nerves by postponing the effective date of certain pro visions, (23) establishing procedures for applying for administrative exemptions from ERISA's prohibited transactions, (24) and setting some regulatory boundaries on the reach of "fiduciary" classification. (25) Yet ERISA's wide-ranging authorization of civil enforcement actions (26) left most issues that would determine the effect of the new fiduciary responsibility regime to be worked out, for good or ill, by the federal courts.

   1. The Fischel-Langbein Proposal

      Judicial implementation of the fiduciary regime was not entirely for the good, according to a famous study by Professors Daniel Fischel and John Langbein that analyzed a dozen years of case law under ERISA. (27)

      ERISA fiduciary law has not been widely reckoned to be on the list of ERISA's major blunders. In the present article we show that it belongs there. We observe that the central concept of ERISA fiduciary law, the exclusive benefit rule, misdescribes the reality of the modern pension and employee benefit trust. We show that the contradictions of the exclusive benefit rule bedevil a remarkable array of the main issues in modern pension trust administration: takeover cases, social investing, employee stock ownership schemes, asset reversions from terminated plans, and judicial review of benefit denials and other plan decisions. We emphasize that the mess in ERISA fiduciary law cannot be ameliorated until courts and other decision makers recognize the multiplicity of interests that inhere in the modern pension and employee benefit trust. (28) Adopting a law and economics perspective, (29) Fischel and Langbein identify two central problems with straightforward application of the exclusive benefit rule. First, it ignores the sponsoring employer's interests in employee benefit programs. (30) Second, it treats the interests of plan participants as monolithic and homogenous, neglecting the often conflicting priorities of different groups of employees. (31)

      To accommodate those varying interests and achieve Congress's goal of broad provision of pension and welfare benefits to workers in private industry, they argue that ERISA should be interpreted and applied in a manner that will maximize the value of the benefit plan to all interested parties. (32) As a component of the employment contract, an employee benefit plan should be construed from an ex ante perspective to augment, to the fullest extent possible, the joint welfare of the employer and employee-participants. (33) Notwithstanding the narrow traditional focus of the private trust law duty of loyalty, Fischel and Langbein hypothesized that ERISA's exclusive benefit rule could be adapted to that end. Only two steps would be required to do so...