Board Member Liability Under ERISA for Retirement Plans
Company officers and boards of directors are always focusing on cost-saving measures for their company as a way to maximize revenue, but those same company leaders often overlook cost-saving procedures to limit their own personal liability for the company’s retirement plans.
Because board members will be deemed to be fiduciaries of the 401(k) plan and other company retirement plans under ERISA’s definition of a fiduciary, board members should have a thorough understanding of the role of a fiduciary and how to implement procedures to limit fiduciary liability.
Who is a Plan Fiduciary Under ERISA?
ERISA states that anyone can be a fiduciary if he or she:
- Has or exercises any discretionary authority or control over management or responsibility over administration of the plan;
- Exercises any authority or control over management or disposition of the plan’s assets;
- Is paid (or can be paid) for investment advice about the plan’s assets; or
Determining the investment options to offer in a retirement plan, control over the company’s stock in the retirement plan and authority or responsibility over the day-to-day administration of the plan means that most officers and board members will be considered fiduciaries of the company’s retirement plans.
What are the Duties of Plan Fiduciaries Under ERISA?
Plan fiduciaries are statutorily required to exercise their responsibilities over both plans and participants at an extremely high level. There are five specific duties of fiduciaries as set forth in ERISA:
- Exclusive Benefit Rule: A plan fiduciary must exercise discretion solely for the purpose of providing plan benefits and defraying reasonable expenses of administering the plan.
- Prudent Man Rule: A plan fiduciary must perform functions for the plan with the care, skill, prudence and diligence that a prudent man familiar with those matters acting in a similar role under the same circumstances would use.
- Prudent Diversification Rule: A plan fiduciary must prudently diversify investment of the plan in order to minimize the risk of large losses and sufficiently fund future benefit obligations, unless under the circumstances it is clearly prudent not to diversify.
- Adherence to Plan Documents: A plan fiduciary must discharge his or her duties in accordance with the plan’s documents and instruments, but only to the extent they are consistent with ERISA’s terms.
- No Prohibited Transactions: A fiduciary must not cause a plan to engage in a transaction the fiduciary knows or should know directly or indirectly benefits a party-in-interest to the plan, which is prohibited under ERISA.
Breaching fiduciary responsibility makes that individual personally liable for any losses to the plan resulting from the breach. Additionally, the fiduciary is responsible for restoring to the plan any profits that the fiduciary made through use of any plan assets. There is joint and several liability when multiple fiduciaries are responsible for a breach, meaning any one of them can be held liable for the full amount of the breach.
How Can Plan Fiduciaries Limit Fiduciary Liability?
There are several ways for board members to limit exposure to fiduciary breaches, although the risk of liability cannot be completely eliminated.
Board members should understand fiduciary obligations and document steps to comply—the process of considering all of the relevant information is often more important than the decision itself. The use of a committee appointed specifically by the company’s board to address plan issues is advisable.
Recognizing that many company officials wish to outsource their fiduciary responsibilities, various third-party service providers are now offering to take on certain plan-related responsibilities. Nevertheless, most of these service providers do not eliminate the fiduciary responsibility for board members and other company officials. There are three types of fiduciaries under ERISA, so any service provider should clearly state its fiduciary status and the specific services it is providing as a fiduciary.
Additionally, when hiring a third-party service provider, the fiduciary should document the hiring process and compare several potential providers to consider whether the fees are reasonable for the services provided. Although plans may use plan assets to pay fair and reasonable operation and administrative expenses of the plan, using plan assets to pay unreasonable fees is a fiduciary violation. To ensure that expenses are fair and reasonable, plan fiduciaries should use industry benchmarks or competitive bidding as well as weighing the expertise and value added by different service providers. Additionally, plan fiduciaries must make decisions with an eye toward limiting plan expenses and ensuring they are reasonable since plan expenses may, over time, reduce the amount of retirement benefits available to plan participants. The decision of whether a plan should pay expenses out of the plan assets is a fiduciary function because expenses that relate to the formation, rather than management, of plans generally should be paid by the plan sponsor and not from the plan assets.
Plan fiduciaries should be wary of service providers offering bundled services for multiple plans, especially if some of the services are provided at no extra cost. Fiduciaries can inadvertently breach the exclusive benefit rule when qualified retirement plan assets are used to benefit the company and other plans.
Is Indemnification or Insurance Available for Plan Fiduciaries?
It is extremely important to obtain the proper fiduciary liability insurance since the fiduciary liability is personal and not corporate. Many company officials erroneously assume that fiduciaries are covered by some sort of insurance, such as directors and officers or employment practice liability policies, but such policies generally do not cover ERISA plan liability. This insurance is also often confused with an ERISA fidelity bond, which is required under law to be purchased by the plan, but the ERISA fidelity bond does not generally cover breach of fiduciary duties.
While ERISA prohibits the use of plan assets to indemnify fiduciaries for their service to an ERISA plan, ERISA does not prohibit a plan sponsor or company from indemnifying its fiduciaries for the services they provide to or for its retirement plans.
What Should Board Members Do Now?
As board members can see from the brief summary above, fiduciaries should take steps now to make sure they comply with ERISA and properly protect themselves from liability.
Leah Morgan Singleton uses a practical and business-focused approach to advise her clients on complex employee benefits matters, drawing on prior experience as a compliance consultant at Alston & Bird, LLP, and as a former small business owner herself. Leah focuses her practice on advising corporate, not-for-profit, governmental and individual clients in all matters relating to employee benefit plans and executive compensation.