Formally organized retirement plan committees have become the norm in recent years. Retirement plans, particularly 401(k) plans, have increasingly adopted consultant-advised governance structures that include fiduciary committees in order to comply with the Employee Retirement Income Security Act of 1974 (ERISA). While we applaud this development, plan sponsors often fail to properly establish retirement committee jurisdiction. The result is an unnecessary proliferation of plan fiduciaries—a/k/a possible defendants—who could be individually named in the event of fiduciary litigation. This post explains how to set up and monitor a retirement plan fiduciary committee in a manner that insulates the plan sponsor’s board and senior management from unnecessary fiduciary exposure. The process is surprisingly simple.
Sometime in the last dozen-and-a half years, dating back at least to litigation involving the Enron 401(k) plan, there began a shift in retirement plan governance. Before then, most plan sponsors were content to simply “outsource” their 401(k) plan to a platform provider—typically a bank, mutual fund complex or insurance company—and let them run the plan. That they might need to pay some attention to plan governance, or even that “plan governance” was a thing, dawned on sponsors only slowly.
In the fall of 2003, a federal district court in Texas denied motions to dismiss the ERISA claims in Tittle v. Enron (In re Enron Corp. Sec. Derivative & ERISA Litig.), 284 F. Supp. 2d 511 (S.D. Tex. 2003). The 300-page opinion caught plan sponsors by surprise. The lawsuit included claims against Enron’s board and senior management as well as its retirement plan committee. Had Tittle v. Enron been an isolated incident, plan sponsors may have forgotten about it. It was not. In 2006, 13 separate lawsuits were filed against major companies claiming that these employers violated their fiduciary obligations under ERISA by selecting funds for their 401(k) plans that charged allegedly excessive fees. These lawsuits were just the beginning of a burgeoning cottage industry among plaintiffs’ law firms against 401(k) and later 403(b) plans. Fiduciary plan committees have become a first line of defense as plan sponsors and fiduciaries seek to insulate themselves from liability. The particular focus is on the selection and monitoring of self-directed 401(k) and 403(b) plan investment options, which require an added layer of fiduciary intervention to insure that the plan fiduciaries are not held liable for investment choices made by rank-and-file plan participants.
A quick internet search of retirement plan or 401(k) plan fiduciary committees returns a plethora of slickly produced PowerPoint presentations, white-papers, advisories, and full-color brochures showing the key features and listing the salient attributes of retirement plan committee formation, function and structure. Committee charters, virtually unheard of a few years ago, are now commonplace. Little is said, however, about the legal status and jurisdiction of the committee. Nor is much attention given to the extent to which committees supplant the authority of management or boards or directors. Simply put, plan sponsors too often seem unconcerned with the retirement committee provenance. This needs to change.
The Parameters and Devolution of Fiduciary Authority
ERISA fiduciaries must, among other things, discharge their duties solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable administrative expenses. In addition, ERISA fiduciaries are held to a duty of prudence, must diversify investments, and must follow plan documents. Creating and following processes for plan investment selection and administration, and documenting such acts, can be instrumental in showing that ERISA fiduciaries have met their duties.
A person can become a fiduciary to an ERISA-covered plan by being named in the plan (a “named fiduciary”), by position (the plan’s trustee, plan administrator and investment manager are always considered fiduciaries), by exercising discretion authority or discretionary control over a plan’s management, assets or administration (a “functional fiduciary”) or by being appointed by another person. There must be a named fiduciary.
By default, the plan sponsor (typically, the employer of the plan’s participants) is the ERISA “plan administrator” unless some other person or entity is appointed to the role. The “plan administrator” is responsible for satisfying the reporting and disclosure requirements of ERISA, e.g., the preparation and distribution of summary plan descriptions and the filing of annual reports. The plan administrator also adjudicates claims and satisfies any income tax withholding requirements on plan distributions.
Named fiduciaries can be either named in, or appointed pursuant to a procedure established by, the plan document. The named fiduciary may further delegate aspects of his or her fiduciary duty to other fiduciaries. The U.S. Department of Labor is of the view, supported by case law, that named fiduciaries cannot fully off-load their fiduciary duties by delegating these duties to others, e.g., to a plan retirement committee or third party administrator. Rather, the delegating fiduciary must ensure that the delegation was prudent and remains so thereafter. This latter, italicized requirement is the source of the “duty to monitor.” While the contours of the duty to monitor are not perfectly defined, there is general agreement that some sort of periodic reporting back up to the appointing fiduciary is a minimum requirement.
The Fiduciary Committee
While it is perhaps possible to avoid even residual fiduciary responsibility on the part of a board of directors—a plan could, for example, designate a fiduciary committee as the named fiduciary by its terms—few plans attempt this. A more common approach is for a plan to designate (say, in a basic plan document) the plan sponsor as the named fiduciary unless otherwise specified in the corresponding adoption agreement. Under the default rule, the board of directors (of a corporation) or the managers (of an LLC) or the partners (in a partnership) are the named fiduciaries.
With proper planning and documentation it is possible to ensure that an organization’s board of directors or managers, as the case may be, has only residual “duty-to-monitor” duties by having the board or members formally vote to establish the fiduciary committee, which does not include board members. It is also possible to ensure that a company’s senior managers have no fiduciary duties by excluding them from committee participation and otherwise ensuring that they keep their distance from plan maintenance and operation.
As a rule of thumb, individuals with no substantive knowledge of retirement plans should not be given substantive fiduciary responsibilities. In the event of litigation, it’s easy to impeach or at least embarrass such an individual by exposing their lack of substantive knowledge. This is the lesson of Tittle v. Enron. It is for this reason that, in the absence of special knowledge or expertise, board members or organization managers should not participate on fiduciary committees. In the contexts of a lawsuit or investigation, it is one thing to ask a board member about the substance of his or her day-to-day actions as a fiduciary; it is quite another thing to ask him or her about his or her proper oversight of others.
What happens when there is no formal grant of authority to a fiduciary committee from the board or members? Such a committee is certainly a functional fiduciary with respect to the things that it does for the plan. This would include, for example, curating the plan’s investment menu. But—and this is the problem—the board or members have retained full-blown fiduciary status, which is not what is intended in most cases.
Appointing the Fiduciary Committee, the Right Way
Plan sponsors ought to start with a clear intention concerning the purpose for and role of their fiduciary committee, which in most cases is for the committee to be the ERISA-named fiduciary and to be responsible for ongoing plan administration. (In larger companies, these duties may be divided up among a fiduciary committee, an investment committee and even a “settlor” committee.) However apportioned, the stakes are high. Fiduciary liability is personal liability; remedies for a breach of fiduciary duties include restoration of losses, disgorgement of profits, or other equitable relief (such as removal of the fiduciary). Committee participation thus should not be taken lightly. Fulsome, periodic, properly documented fiduciary training for committee members is non-negotiable. Plan sponsors should also indemnify committee members for their service in the ordinary course, and obtain ERISA fiduciary insurance (which is in addition to and not to be confused with an ERISA fidelity bond).
There should also be a formal vote of the board or LLC members establishing or ratifying the committee, adopting a charter, appointing committee members (ex officio, by name or a combination of the two), and adopting any necessary plan amendments. As a prophylactic, the board or LLC members might also ratify the past actions of an ongoing committee. Once done, the appointing fiduciaries have a duty to monitor the committee actions. This duty can be satisfied by having the committee report to the board or managers, as the case may be, at least annually and more often in special circumstances. Many committees do this using a brief PowerPoint presentation listing the committee’s projects and accomplishments during the course of the reporting period, e.g., moved x funds to the watch list, swapped out y funds for performance failures, conducted a participant education program, etc.
While it’s not clear how widespread the problem of failing to properly establish a fiduciary committee is, we suspect that it is not trivial. These failures carry with them unnecessary risks. Proper compliance is within reach.