Who is a Fiduciary?

For purposes of ERISA, a fiduciary is generally anyone with discretionary authority or control over the management of a plan, the administration of a plan, or the disposition of a plan’s assets. In most cases, the authority to administer the plan and to select its investments falls on either the company sponsoring the plan or a plan “committee.” Therefore, the company and/or the committee are usually fiduciaries under ERISA. This is the case even though a third party may actually administer the plan.

Fiduciary Obligations Under ERISA

ERISA contains general fiduciary standards that apply to all fiduciary actions. Fiduciaries are required to discharge their duties:

• solely in the interests of participants and beneficiaries (the exclusive benefit rule);
• with the care, skill, prudence and diligence under the circumstances that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aim (the prudent man rule);
• by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so (the diversification rule); and
• in accordance with the documents and instruments governing the plan.

If such a duty is breached, a fiduciary may be held personally liable for, among other things, any plan losses resulting from the breach.

Applying ERISA Fiduciary Duties to 401(k) Plan Administration

Plan Investments. To fulfill its fiduciary duties with respect to plan investments, a plan fiduciary must prudently select the investment funds offered under the plan, monitor the performance of these investment funds, and replace those investment funds that are no longer prudent. It is advisable for a plan committee to meet at least quarterly to evaluate the performance of the plan’s investment funds. Plan fiduciaries should also seek advice from independent experts when selecting, monitoring and removing investment funds.
A plan fiduciary is not expected to have a crystal ball to select the best performing investment funds. However, a fiduciary should follow prudent procedures that enable it to select investment funds that are reasonably expected to outperform their peers. Even if an investment fund has negative earnings, a plan fiduciary will not be liable for losses as long as it has complied with prudent procedures.
If investment decisions are challenged, either by a Department of Labor investigation or by a civil lawsuit, plan fiduciaries must be able to show documentation that they engaged in a prudent investment decision-making process. This documentation should include the following:

• written investment policy guidelines for selecting investment options and monitoring investment options and investment managers;
• written documentation on all investment decisions; and
• periodic reports to evidence the ongoing oversight of investment performance.

Company Stock. In the post-Enron world, fiduciaries should be aware of the considerations that arise in relation to plan investments in company stock. Although ERISA’s diversification requirements generally prohibit plans from investing more than 10 percent of plan assets in company stock, ERISA permits “eligible individual account plans,” including 401(k) plans, to acquire and hold company stock without limitation.
The Department of Labor has filed an amicus curiae brief in the Enron litigation which provides some insight into the principal issues involving plan investment in company stock. For example, the DOL has stated that ERISA’s fiduciary duties still apply to prevent investments in company stock that the fiduciary should know would be unsuccessful. Thus, a fiduciary should monitor company stock as it would any other investment offered under the plan.

Duty To Disclose. The duty of a fiduciary to disclose material information to participants is evolving. Clearly, plan fiduciaries have the duty not to lie to participants or affirmatively mislead participants about plan terms or important aspects of the plan. What is not clear is whether a plan fiduciary has a duty to disclose truthful information on its own accord. For example, it is unclear whether a fiduciary must disclose to participants business problems with the company that may negatively impact the company stock held under the plan.

The DOL amicus brief suggests that a plan fiduciary does, in fact, have an affirmative duty to disclose material information about the plan and its investments. If the DOL’s view is correct, then it would be in the best interests of a fiduciary to disclose the information as soon as possible. However, if the information that the fiduciary possesses were “insider” information such that disclosure would violate federal securities law, we would typically recommend against disclosing the information.

This is only a brief summary of the basic principals of ERISA fiduciary law and general advice applicable to some but not all plans. D&G is an expert on the complexities that often arise in the area of fiduciary responsibility and can provide you with specific advice on the steps a plan sponsor should adopt to ensure full compliance.

© 2001 Davis & Gilbert LLP