An excerpt from the PLUS Journal article “Who May Sue You and Why, How to Reduce Your Employee Retirement Income Security Act (ERISA) Risks, and the Role of Fiduciary Liability Insurance – Part I” (January 2011) by authors Charles C Jackson , D. Ward Kallstrom and Alison L Martin.
Providing a well-structured employee benefits program ( e.g., medical, life, disability, and retirement plans) can go a long way toward attracting and retaining an appropriately skilled workforce-but doing so is not without its challenges. Employers need to carefully weigh the human resource advantages of providing benefits against the obligations they undertake in doing so. Establishing a balance between corporate benefits and obligations is especially difficult because the legal rules governing employee benefit plans-established under the Employee Retirement Income Security Act of 1974 (ERISA)-are complex (or, as the U.S. Supreme Court put it, “comprehensive and reticulated”).
At the same time, benefit plan fiduciaries and plan sponsors today confront an increasingly active and ERISA-sophisticated plaintiffs’ class action bar. In addition, due to tightened legal rules for bringing securities cases, there has been a recent influx of skilled counsel from the securities field to the benefits arena, increasing both the chances that ERISA lawsuits will be filed and their potential financial impact when they are. On the other hand, because ERISA litigation is very different from securities litigation, skilled ERISA defense counsel who understands ERISA’s complexities and nuances nonetheless can help provide a strong tactical advantage against such litigation.
ERISA class action lawsuits are not confined to the largest employers. Employers and plans of all sizes are vulnerable. Particularly in times of economic transition-when layoffs, workforce adjustments, and corporate mergers and acquisitions are more likely to occur-more plan participants are willing to step forward as ERISA plaintiffs. ERISA contains a discretionary statutory fees provision that, as applied, almost always provides attorneys’ fees to the plaintiffs when they prevail, but not to the defendants. This provision provides additional incentives to plaintiffs’ lawyers to bring such suits.
Although there are no “silver bullets” protecting employers, plans, and fiduciaries from litigation, employee benefits professionals can improve the chances that their company’s employee benefits program may avoid litigation and defeat legal challenge. The path to potentially reducing legal exposure begins with a sound understanding of the ERISA-defined roles of plan-related personnel. ERISA does not impose liability at large. Rather, from the board of directors to the benefits manager, an individual’s role with respect to an employee benefit plan is critical to understanding potential exposure, including possible individual liability.
Understanding the ERISA Responsibilities of Plan Sponsors, Fiduciaries, and Parties in Interest
ERISA plans carry with them a host of complicated and interrelated responsibilities, which typically fall on different but interrelated players. On the one hand, setting up or changing benefit plans is the quintessential plan “settlor” activity. On the other hand, faithfully administering the plan is a core “fiduciary” activity. But oftentimes a single individual may have both a settlor and a fiduciary role, or the roles, or parts of them, may be allocated to more than one person. This intermingling of roles and responsibilities is most apparent in class action litigation where, as a general rule, anyone remotely connected to an ERISA plan will be named in the lawsuit. Lawsuit targets typically include the plan sponsor; the plan administrator; any named fiduciaries, particularly members of any investment committees; appointing fiduciaries, particularly the CEO and members of the board of directors; the record keeper and/or trustee of the plan; investment managers; and other service providers ( e.g., accountants, consultants, investment advisors, and attorneys).
While there is no avoiding such “all in” litigation, understanding the roles of key players with respect to an ERISA plan is an important first step to help defeat these lawsuits. First, a “plan sponsor” is usually the company or employer that sets up a plan for the benefit of its employees. The responsibilities of the plan sponsor are called “settlor” functions which include plan creation, plan amendment and plan termination functions. Settlor functions are not subject to ERISA’s fiduciary rules and generally cannot be attacked unless they violate the substantive statutory requirements of ERISA itself (or other federal laws such as Title VII and the Age Discrimination in Employment Act, as well as state laws that ERISA does not preempt).
On the other hand, one does not need to be named as a fiduciary in plan documents to be deemed one. Under ERISA, “fiduciary” is defined functionally; conduct can make someone a fiduciary. Put in simple terms, under ERISA, a person is a fiduciary to the extent he or she (1) exercises discretionary authority or control over plan management; (2) exercises any authority or control over plan assets; (3) has any discretionary authority over plan administration; or (4) gives investment advice for a fee. A person becomes a fiduciary by being formally designated as a fiduciary, functioning as a de facto fiduciary, or appointing other fiduciaries. By default, the plan sponsor (usually the employer) is deemed to be the plan administrator (and hence a fiduciary when acting in that capacity) if one is not named in the plan document. The test for fiduciary status is functional, meaning that plans may have unintended and unknowing fiduciaries.
Being a fiduciary, however, is rarely a singular job. Plan sponsors often appoint managers or other company representatives to a fiduciary role, and those individuals must reconcile their “business” roles with their “fiduciary” roles. There is nothing wrong with that arrangement. In fact, ERISA specifically allows fiduciaries to wear “two hats”-one fiduciary and one non-fiduciary. In that case, the individual is a fiduciary only when performing fiduciary functions.
ERISA also separately identifies “parties in interest.” Parties in interest include not only ERISA fiduciaries but also any person providing services to a benefit plan, the employer whose employees are covered by the plan, unions whose members are covered by the plan, and various other defined parties or entities that have some relation to the plan. Although fiduciaries are subject to the prudent man rule of ERISA Section 404, parties in interest are subject to the prohibited transaction provisions of ERISA Section 406. Section 406 automatically bars certain transactions with respect to benefit plans unless the party in interest can invoke one of the numerous exemptions to proscribed conduct provided by ERISA Section 408.
PLUS members can read this entire article in the PLUS Journal archive.