This article is the first in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with ERISA requirements.
On Labor Day, 1974, President Gerald Ford signed the Employee Retirement Income Security Act, commonly known as ERISA, into law. Prior to ERISA, employee pensions had scant protections under the law, a problem made clear when the Studebaker automobile company closed its South Bend, Indiana production plant in 1963. Upon the plant’s closing, some 4,000 employees—whose average age was 52 and average length of service with the company was 23 years—received approximately 15 cents for each dollar of benefit they were owed. Nearly 3,000 additional employees, all of whom had less than 10 years of service with the company, received nothing.
A decade later, ERISA established statutory requirements to preserve and protect the rights of employees to their pensions upon retirement. Among other things, ERISA defines what a plan fiduciary is and sets standards for their conduct.
Who is—and who isn’t—a plan fiduciary?
ERISA defines a fiduciary as a person who:
- Exercises discretionary authority or control over the management of an employee benefit plan or the disposition of its assets,
- Gives investment advice about plan funds or property for a fee or compensation or has the authority to do so,
- Has discretionary authority or responsibility in plan administration, or
- Is designated by a named fiduciary to carry out fiduciary responsibility. (ERISA requires the naming of one or more fiduciaries to be responsible for managing the plan's administration, usually a plan administrator or administrative committee, though the plan administrator may engage others to perform some administrative duties).
If you’re still unsure about exactly who is and isn’t a plan fiduciary, don’t worry, you’re not alone. Disagreements over whether or not a person acting in a certain capacity and in a specific situation is a fiduciary have sometimes required legal proceedings to resolve them. Here are some real-world examples.
Employers who maintain employee benefit plans are typically considered fiduciaries by virtue of being named fiduciaries or by acting as a functional fiduciary. Accordingly, employer decisions on how to execute the intent of the plan are subject to ERISA’s fiduciary standards.
Similarly, based on case law, lawyers and consultants who effectually manage an employee benefit plan are also generally considered fiduciaries.
A person or company that performs purely administrative duties within the framework, rules, and procedures established by others is not a fiduciary. Examples of such duties include collecting contributions, maintaining participants' service and employment records, calculating benefits, processing claims, and preparing government reports and employee communications.
What are a fiduciary’s responsibilities?
ERISA requires fiduciaries to discharge their duties solely in the interest of plan participants and beneficiaries, and for the exclusive purpose of providing benefits for them and defraying reasonable plan administrative expenses. Specifically, fiduciaries must perform their duties as follows:
- With the care, skill, prudence, and diligence of a prudent person under the circumstances;
- In accordance with plan documents and instruments, insofar as they are consistent with the provisions of ERISA; and
- By diversifying plan investments so as to minimize risk of loss under the circumstances, unless it is clearly prudent not to do so.
A fiduciary is personally liable to the plan for losses resulting from a breach of their fiduciary responsibility, and must restore to the plan any profits realized on misuse of plan assets. Not only is a fiduciary liable for their own breaches, but also if they have knowledge of another fiduciary's breach and either conceals it or does not make reasonable efforts to remedy it.
ERISA provides for a mandatory civil penalty against a fiduciary who breaches a fiduciary responsibility under ERISA or commits a violation, or against any other person who knowingly participates in such breach or violation. That penalty is equal to 20 percent of the "applicable recovery amount" paid pursuant to any settlement agreement with ERISA or ordered by a court to be paid in a judicial proceeding instituted by ERISA.
ERISA also permits a civil action to be brought by a participant, beneficiary, or other fiduciary against a fiduciary for a breach of duty. ERISA allows participants to bring suit to recover losses from fiduciary breaches that impair the value of the plan assets held in their individual accounts, even if the financial solvency of the entire plan is not threatened by the alleged fiduciary breach. Courts may require other appropriate relief, including removal of the fiduciary.
Over the coming months, we’ll share a series of blogs for employee benefit plan fiduciaries, covering everything from common terminology to best practices for plan documentation, suggestions for navigating fiduciary risks, and more.
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