Fiduciary Duties Under ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) was enacted in large part as a result of the Studebaker automobile manufacturer’s failure to pay its employees their promised pension benefits when it closed its plant in 1963.  ERISA sought to provide greater protections for employees and their retirement benefits.  (For more information on ERISA’s history, view our article here.)  One of ERISA’s most important features is that it imposes strict fiduciary duties on a number of individuals (or entities) who handle plan assets and make discretionary decisions related to the plan.  Understanding who qualifies as a fiduciary and what ERISA’s fiduciary duties are is important for anyone involved with the administration of an employee benefit plan.

ERISA’s fiduciary duties apply broadly to any plan, fund, or program established or maintained by an employer to provide benefits for its employees and their beneficiaries.  The only exceptions to ERISA include governmental plans, church plans, plans maintained outside the United States primarily for nonresident aliens, unfunded excess benefit plans, top hat plans, and plans maintained solely to comply with workers’ compensation, unemployment compensation, or disability insurance laws.  Even then, state law may apply fiduciary duties to those plans and benefits that are analogous to the fiduciary rules under ERISA.

Who is a Fiduciary?

ERISA defines a fiduciary as a person who:

• Exercises discretionary authority or control over plan management, assets, and/or administration;
• Renders investment advice for a fee or other compensation, direct or indirect, with respect to the plan;
• Is a named fiduciary in the plan document or by appointment as described by the plan document; or
• Exercises any discretionary authority or responsibility in the administration of the plan.

Whether a person is deemed a fiduciary under ERISA depends on their function, authority, and responsibility, and is not dependent on their title or status. Therefore, a person may act as a fiduciary unknowingly or inadvertently.

Common fiduciary roles include plan trustees, administrators, investment committee members, and investment managers.  The named trustee under ERISA is nearly always the employer sponsoring the plan.

What are the Fiduciary Duties?

It is important to recognize when you may be acting as a fiduciary because failing to adhere to ERISA’s fiduciary duties may result in personal liability. Under ERISA, fiduciaries must comply with the following duties, which are known as the highest standards in the law:

• Duty of undivided loyalty: acting for the exclusive purpose of providing benefits to participants and to pay only the expenses that are reasonable and relate to plan activities;
• Duty of prudence: acting with care, skill, prudence, and diligence;
• Duty to diversify the investments of the plan: diversifying investments, when prudent to do so, to minimize the risk of large losses; and
• Duty to administer the plan in conformity with the plan documents: following the terms of the plan, as long as the plan is consistent with ERISA.

In addition, fiduciaries may not cause a plan to engage in a prohibited transaction with parties in interest or take actions that lead to a conflict of interest between the fiduciary and the plan.

A fiduciary that fails to act in accordance with these duties may be personally liable to reimburse the plan for any losses resulting from the breach, restore to the plan any profits made through use of plan assets, or face civil or criminal penalties. Additionally, the court may impose other equitable or remedial relief such as removing the fiduciary from their position or requiring the fiduciary to pay damages and/or attorney’s fees.

Fiduciary Litigation Trends

Most of the litigation surrounding ERISA fiduciaries has historically focused on retirement plans. Recently, however, litigation surrounding welfare plans is on the rise. For example, in Lewandowski v. Johnson & Johnson, an employee sued Johnson & Johnson fiduciaries, including its benefits committee and individual committee members, for failing to act prudently in selecting and monitoring service providers, failing to ensure plan expenses were reasonable, and failing to provide plan documents upon request. The alleged breaches led to increased insurance premiums, drug costs, and cost sharing. The lawsuit has the potential to result in millions of dollars in liability. Following the Lewandowski case, there has been an uptick in other lawsuits alleging similar claims against plan fiduciaries both in relation to retirement plans as well as welfare plans.

Mitigation of Liability

While there are a variety of strategies for mitigating liability, the most effective way to do so is to ensure that fiduciaries are informed about their roles and responsibilities. We encourage you to reach out to our Benefits team for more information regarding its fiduciary training offerings or to obtain further counsel as to ERISA’s fiduciary duties, generally, and best practices for plan and fiduciary committee governance.

Carrie E. Schwab
Kaitlyn E. Mattox, Summer Associate