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Overview of ERISA Fiduciary Responsibility and Liability and Best Practices


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Title: Overview of ERISA Fiduciary Responsibility and Liability and Best Practices

Overview of ERISA Fiduciary Responsibility and
Liability and Best Practices
  • Marcia S. Wagner, Esq.

  • TD Ameritrade and The Wagner Law Group are
    separate and unaffiliated companies and are not
    responsible for each other's policies or
    services. This presentation is provided for
    informational purposes only. The material, views
    and opinions expressed in this presentation are
    solely those of the presenter and are not
    necessarily reflective of those held by TD
  • TD Ameritrade Trust Company is a non-depository
    trust company, acts as a custodian and/or
    directed trustee and is not a member of FINRA,
    SIPC or NFA. Brokerage services provided by TD
    Ameritrade Institutional, Division of TD
    Ameritrade, Inc., member FINRA/SIPC/NFA. TD
    Ameritrade Trust Company and TD Ameritrade, Inc.
    are subsidiaries of TD Ameritrade Holding
    Corporation. TD Ameritrade is a trademark jointly
    owned by TD Ameritrade IP Company, Inc. and The
    Toronto-Dominion Bank. Used with permission

  • I. Fiduciary Responsibilities Under ERISA
  • II. Fiduciary Risk and Potential Liability
  • III. Fiduciary Protection and Best Practices

I. Fiduciary Responsibilities Under ERISA
  • An ERISA plan must have at least 1 fiduciary.
  • Typically, plan sponsor is the plans Named
  • Plans advisor is also a fiduciary if advisor
    provides investment advice.
  • Person is not a fiduciary if such individual or
    entity only performs ministerial functions.

Definition of Fiduciary
  • Fiduciary includes the following
  • Person with discretionary authority over
    management of plan.
  • Person with authority over disposition of plan
  • Advisors who provide investment advice for a fee.
  • Person with discretionary authority with respect
    to plan administration.
  • Functional test
  • Formal appointment is not required to become a
    plan fiduciary.
  • Fiduciary-like conduct is sufficient to confer
    fiduciary status on a person.

Definition of Investment Advice
  • Person provides investment advice if
  • Advice on value or advisability of investments
  • is provided to plan on regular basis
  • under mutual understanding that advice will be
  • primary basis for investment decisions
  • and based on particular needs of plan.
  • Investment education is not fiduciary advice.
  • On Oct. 21, 2010, the DOL proposed changes to
    investment advice definition, broadening
    category of advisors subject to ERISA.

Fiduciary Responsibilities
  • Fiduciary standard of care under ERISA.
  • Must act solely in interest of plan participants
  • Exclusive purpose of providing benefits to plan
  • Carrying out duties prudently.
  • Following terms of plan document unless
    inconsistent with ERISA.
  • Diversifying plan investments.
  • Paying only reasonable plan expenses.

Focusing On Specific Duties
  • Exclusive purpose of providing benefits
  • Primary responsibility to act solely in interest
    of participants.
  • Carrying out duties prudently
  • Must manage plan assets with care, skill,
    prudence and diligence
  • that a prudent person acting in a similar
  • and familiar with such matters would exercise.
  • Duty of prudence focuses on process.
  • Following terms of plan document
  • Must obey unless inconsistent with ERISA.

Focusing On Specific Duties (contd)
  • Diversifying plan investments
  • Must diversify plans investments in order to
    minimize risk of large losses.
  • Paying only reasonable plan expenses
  • Must ensure fees paid to plans providers are
  • Separately, prohibited transaction rules also
    require (1) service arrangement must be
    reasonable, (2)
    services must be necessary, and
    (3) compensation must be reasonable.
  • ERISA 408(b)(2) regs will require providers to
    deliver fee disclosures to plan sponsors (July

Fiduciary Protection Under ERISA 404(c)
  • ERISA Section 404(c)
  • Plan sponsor is responsible for
    participant-directed investments unless plan
    complies with ERISA 404(c).
  • Many plans fail to comply with ERISA 404(c)
    requirements operationally.
  • Conditions of ERISA Section 404(c)
  • Participant must exercise independent control.
  • Plan menu must have broad range of investment

ERISA 404(c) Conditions
  • Exercising independent control
  • Participant must have reasonable opportunity to
    give instructions, and have sufficient
  • DOL finalizes rules on participant-level
    disclosures on Oct. 14, 2010, amending
    404(c)-related disclosures.
  • Broad range of investment options
  • Participant must have reasonable opportunity to
    materially affect investment return, choose from
    at least 3 options, and diversify investments.
  • Duty to select/maintain investment menu
  • Must manage investment options in accordance with
    duties of prudence and diversification.

II. Fiduciary Risk and Potential Liability
  • Fiduciary liabilities
  • ERISA permits participants to bring lawsuits
    against fiduciaries who breach their duties.
  • Responsible fiduciary is personally liable for
    losses resulting from breach of duties.
  • Other types of relief may be available from
  • DOL penalty for fiduciary breach
  • 20 civil penalty by DOL under ERISA 502(l).
  • DOL has discretion to reduce or waive penalty.
  • IRS may impose also impose excise taxes under
    prohibited transaction rules.

Co-Fiduciary Liability
  • ERISA 405(a) imposes co-fiduciary liability on
    Fiduciary 1 for a breach by Fiduciary 2 if
  • Fiduciary 1 knowingly participates in breach by
    Fiduciary 2,
  • Fiduciary 1 fails to discharge its duties,
    enabling breach by Fiduciary 2, or
  • Fiduciary 1 knows of breach by Fiduciary 2, but
    does not make reasonable efforts to remedy.
  • Thus, a fiduciary who becomes aware of another
    fiduciarys bad acts must take reasonable action.

Breaches Prior To or After Being a Fiduciary
  • Ordinarily, fiduciary is not liable for breach
    committed before/after becoming fiduciary.
  • However, fiduciary must take steps to remedy
    breach if he or she becomes aware of breach.
  • Must take action if new fiduciary becomes aware
    of a breach which occurred previously.
  • Co-fiduciary liability arises if no action is
    taken to correct such breach.

Liability Relating to Duty to Pay Reasonable Plan
Expenses Only
  • Increased interest in 401(k) fees has resulted in
    lawsuits against employers and providers.
  • Types of claims made by participants in class
    action lawsuits
  • Plan fiduciaries failed to monitor indirect
    compensation from plans investment providers to
    other service providers (e.g., revenue sharing).
  • Selection of inappropriate share class (i.e., use
    of retail instead of cheaper institutional
    share class).
  • Fees not adequately disclosed to plan

Recent Developments in 401(k) Litigation
  • First generation of 401(k) fee lawsuits launched
    against plan providers.
  • Haddock v. Nationwide Financial Services
  • Investment provider sued over its receipt of
    fees from mutual funds offered under annuity
  • Ruppert v. Principal Life Insurance Company
  • Complaint that fiduciary standards breached
    by service providers receipt of revenue sharing
    payments from mutual funds
  • Phones Plus, Inc. v. Hartford Financial Services
  • Complaint that The Hartford received revenue
    sharing payments for services that it was already
    obligated to provide to its plan clients

Second Generation of Fee Litigation Cases
  • The Main Thrust dozens of lawsuits filed
    against plan sponsors.
  • Class actions brought on behalf of participants.
  • First cases brought by small St. Louis litigation
  • Defendants are large employers, company officers
    and plan committees.
  • New Tactics another round of lawsuits filed
    against plans sponsors and providers.
  • Allegations that revenue sharing payments to
    other providers should have been used for benefit
    of participants.

Recent Wins for Defendants
  • Courts generally reluctant to dismiss 401(k) fee
    suits before factual findings are made.
  • Exception Hecker v. Deere
  • Suit filed against employer and Fidelity for
    (1) excessive fees in investment options, and
    (2) failure to disclose revenue sharing.
  • 7th Circuit affirmed motion to dismiss (2009).
  • Court was influenced by plans brokerage window
    providing access to 2,500 mutual funds.
  • Plaintiffs (with support of DOL) ask 7th Circuit
    for rehearing, but petition is denied.
  • Other defendants in recent 401(k) fee cases have
    successfully defended themselves.

Recent Wins for Plaintiffs
  • Braden v. Wal-Mart Stores, Inc.
  • As 401(k) sponsor, Wal-Mart selects retail mutual
    funds (with 12b-1 fees) for plans menu.
  • Given its large size (10B), the Wal-Mart plan
    could have selected institutional fund shares.
  • Wal-Mart must demonstrate fees are reasonable.
  • Plaintiffs in other 401(k) fee cases have won
    monetary settlements.
  • Tibble v. Edison International (2010) is one of
    first 401(k) fee cases to go to trial.
  • Plaintiffs win on judgment, and court rules
    retail funds were imprudently selected for plan

Implications of 401(k) Fee Cases
  • Unclear whether cases will result in significant
    recoveries for plaintiffs.
  • Victories for plaintiffs could result in exposure
    for many similar 401(k) plans.
  • Additional lawsuits likely.
  • Litigation publicity will increase regulatory and
    legislative pressure.
  • Non-monetary settlement terms are likely to
    become best practices for plans generally.

III. Fiduciary Protection and Best Practices
  • ERISA bond protects plan only.
  • ERISA 412 requires bonding for every person who
    handles plan funds.
  • Must cover 10 of plan assets, subject to
    500,000 maximum (1M if plan holds employer
  • Exemption for broker-dealers.
  • Fiduciary liability insurance
  • Protects plan or fiduciaries.
  • Generally covers trustees, plan sponsor and their
  • May be purchased by plan or plan sponsor.

Professional Liability Insurance
  • Protects plan consultants and advisors.
  • Also referred to as EO insurance.
  • Coverage for certain claims typically excluded.
  • Claims arising out of impropriety of plans
    payment of service fees.
  • Claims arising from late trading or market
  • Claims arising from soft dollar or revenue
  • Exclusions can be modified by negotiation.
  • Dollar limits on policy coverage may apply.

Contractual Limitation on Liability
  • Limitation on liability provisions
  • Indemnification of service providers
  • DOL position in Adv. Op. 2002-08A
  • Contract must not limit providers liability for
    its fraud or misconduct.
  • Limitation on liability for negligence may be
  • Due diligence procedures
  • Assess reasonableness of relationship as a whole.
  • Document assessment in consideration of plans
    potential risk of loss due to limitation on

Fiduciary Investment Reviews
  • Investment Policy Statement (IPS)
  • Written IPS can help demonstrate compliance with
    ERISA fiduciary standards.
  • IPS should include clear standards.
  • Continuous monitoring
  • Investments should be reviewed regularly.
  • Plan fiduciaries must understand analysis.
  • Replace funds that do not meet criteria.
  • IPS can help with decision-making process.

Fiduciary Investment Reviews (contd)
  • Documentation of fiduciary reviews
  • Documentation can help demonstrate fiduciary
  • Utilize independent investment expert.
  • Can provide valuable reports, analysis and
  • Fiduciaries should always consider whether advice
    is conflicted.
  • Evaluating expense ratios/fees
  • Fiduciary review should take into account all
    fees and expenses.

Best Practices Arising from 401(k) Fee Litigation
  • Plan sponsors are beginning to adopt best
    practices with respect to 401(k) fees.
  • Plan fiduciaries are judged by their processes.
  • Professionals and providers can assist plan
    sponsors implement best practices.
  • Developing process to understand fees.
  • Plan sponsors must make effort to learn how much
    plan and participants are actually paying.
  • There are many types of indirect fees
    (e.g., soft dollars, sub-transfer
    agency fees, 12b-1 fees, sales charges, revenue
    sharing and float).

Best Practices Arising from 401(k) Fee
Litigation (contd)
  • Comparing fees against benchmark
  • Establish objective process to assess
    (1) qualifications of
    (2) quality of services, and
    (3) reasonable of
    fees in light of services provided.
  • Benchmarking services
  • Can assist employer identify any hidden fees.
  • Equips employer with tool to be used as part of
    prudent review process.
  • Provides competitive pricing information.

Best Practices Arising from 401(k) Fee
Litigation (contd)
  • Documenting reviews of providers and fees
  • Review of providers fees should be properly
  • Documentation should demonstrate thoughtful
  • Solicit bids when considering a new provider, and
    document bid process.
  • Conducting fiduciary audit
  • Hire independent third party to audit plans
    external fiduciaries.

Best Practices Arising from 401(k) Fee
Litigation (contd)
  • Fiduciary manual
  • Helps plan fiduciaries better understand their
    responsibilities under the plan.
  • Fosters ERISA compliance and can serve as a
    reference guide for fiduciary duties.
  • Can serve as compliance tool for monitoring
  • Disclosure to participants
  • In light of pending rules and current litigation
    environment, ensure meaningful fee disclosures
    are provided to participants.

Fiduciary Relief Offered by Certain Platform
  • Program intended to share or relieve investment
    responsibilities of 401(k) plan sponsor.
  • First Approach
    (1) Independent
    firm prepares premier list of funds from
    providers platform
    (2) Sponsor selects funds from
    pre-approved list and

    (3) Independent firm agrees to serve as
  • Second Approach
    (1) Provider has model
    list of options from broad range of investment
    (2) Sponsor must select funds for each category
    (3) Provider guarantees compliance with
    certain aspects of ERISA prudence requirement.

Fiduciary Relief Offered by Certain Platform
Providers (contd)
  • Program provides some assurances to plan sponsor.
  • Fine print should be examined closely.
  • Questions to ask platform provider
  • Standards for conduct?
  • Aspects of fiduciary duties/liability not
  • When does relief apply?
  • Does sponsor ever have to indemnify provider?
  • Fees
  • Notice for removal of investment option from

  • Fiduciary protection is available from many
  • ERISA bond (protecting plan)
  • Fiduciary liability insurance (protecting
  • Professional liability insurance (protecting
  • Contractual limitations on liability
  • Fiduciary investment reviews
  • Best practices arising from 401(k) fee litigation
  • Fiduciary relief offered by certain platform

Overview of ERISA Fiduciary Responsibility and
Liability and Best Practices
  • Marcia S. Wagner, Esq.

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