The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), imposes significant responsibilities upon the plan sponsor of an employee benefit plan. Given the gravity of these fiduciary obligations, many employers choose to create an administrative committee (a “Committee”) devoted to the proper management and control of the operation and administration of the retirement plans they sponsor. Generally, a Committee is given primary responsibility for making rules, regulations and interpretations for the plan and for taking such actions as are necessary to administer the plan.
ERISA establishes a broad, functional definition of a fiduciary. A person is a fiduciary to the extent that he or she has any discretionary authority or responsibility in the administration or management of a plan or exercises any discretionary authority or control with respect to the management or disposition of the plan’s assets. Under this definition, Committee members will often be functioning as fiduciaries for purposes of ERISA. This article is intended to provide an overview of the fiduciary duties imposed by ERISA and to offer some general guidelines for plan sponsors and Committee members to consider with regard to the operation of a Committee.
Overview of Fiduciary Responsibility
Generally speaking, ERISA contains four standards to which fiduciaries are held in the discharge of their duties:
Duty of Loyalty: The Exclusive Benefit Rule
A fiduciary of a plan must discharge his or her duties with respect to the plan exclusively for the benefit of the plan participants and their beneficiaries and for the purposes of defraying the reasonable expenses of administering the plan. In particular, the assets of a plan must never inure to the benefit of the employer plan sponsor. The prohibited transaction provisions of ERISA prohibit fiduciaries from engaging in any transaction that raises a potential conflict of interest and establishes certain types of transactions that are per se unlawful.
Prudence: The Prudent Man Rule
A fiduciary must exercise the care, skill, prudence and diligence under the circumstances then prevailing that a “prudent man” acting in a like capacity and familiar with such matters would use in the conduct of a like enterprise with like aims. This is a higher standard than that of ordinary or reasonable care. Reasonable care alone, while necessary, may not be sufficient. A fiduciary is required to have some familiarity with the areas involved in discharging his or her duties. In an appropriate circumstance, the fiduciary must recognize the need for expert assistance or advice and must seek to obtain such assistance or advice.
The Diversification of Investments Rule
A plan fiduciary must ensure that plan investments are diversified to minimize the risk of large losses unless, under the circumstances, it is clearly prudent not to diversify. Even in employee-directed plans where participants control their investment choices (under ERISA section 404(c)), plan fiduciaries have responsibilities regarding investments. Plan fiduciaries must ensure that a range of investment alternatives are available to participants, so those participants have an effective opportunity to achieve diversification. Investment responsibilities in general and ERISA section 404(c) in particular are described further below.
Administration in Compliance with Plan Documents
A plan fiduciary must administer the plan in accordance with the provisions of the plan unless the provisions of the plan are inconsistent with ERISA, in which case the fiduciary is obligated to act in conformity with ERISA and to ignore any unlawful plan provision. While a plan administrator has some discretion in interpreting, applying and administrating the provisions of the plan, it is important that the plan terms be applied on a consistent basis, and not “overlooked” in a given sympathetic case. The fiduciary’s responsibility is to the plan as a whole, not to individual participants. Compliance with this rule requires that the plan’s provisions be fairly and consistently applied.
Breach of Duty
A fiduciary that breaches any of the responsibilities, obligations or duties imposed by ERISA is personally liable to make good any losses to the plan resulting from each breach. A fiduciary is also personally liable to restore to the plan any profits which have been received through the improper use of plan assets. Additionally, the fiduciary may also be subject to civil actions and/or criminal penalties. Even a careful fiduciary may be required to defend his or her actions (or inactions), if events do not transpire as expected. Particular care should be taken in the selection and monitoring of plan agents and advisors.
Allocation of Fiduciary Responsibility
The Committee may itself delegate particular responsibilities to members of the Committee, employees of the company or other agents, each of which may retain others (such as lawyers and investment professionals) to render services or give advice to the plan. Even with such delegation, the Committee retains overall responsibility for the proper discharge of its fiduciary obligations under the plan.
As the plan fiduciary, the Committee may choose to delegate non-trustee fiduciary responsibilities to someone other than the Committee if the plan document permits. (Certain plan trustee responsibilities generally may not be delegated.) Delegable responsibilities may include day-to-day plan administration, disbursement of plan benefits, review of benefit claims and investment management. The Committee may also hire agents to perform certain legal duties required by ERISA and other laws. If the Committee exercises prudence in the selection and monitoring of such agents, the fiduciary should generally be entitled to rely on the information, data, statistics and analysis provided by the agent.
One important responsibility that may be delegated by the plan sponsor to the Committee is the selection of the investments made by the plan (or, in a “self directed” plan, the investment options offered to participants). When this is the case, the Committee should expect to periodically review the performance of the investments held (or offered) under the plan against the performance of competing programs. It may be useful for the Committee to actively solicit information regarding alternative funds and programs. If so, data should be comprehensively assembled and analyzed so that the Committee may consider costs and past performance of the current selections to contrast them with competing funds and programs. In discharging this responsibility, the Committee may find it appropriate to obtain independent professional analysis and advice regarding these matters.
The Committee must give appropriate consideration to the facts and circumstances that are relevant to the particular investment or investment course of action involved, including the role the investment or investment course of action plays in that portion of the plan’s investment portfolio for which the fiduciary has investment duties. “Appropriate consideration” includes a determination by the Committee that the particular investment or investment course of action is reasonably designed, as part of the portfolio, to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action.
The Committee should expect to consider the composition of the plan’s portfolio with regard to diversification, the liquidity and current return of the portfolio relative to the anticipated cash flow requirement of the plan, and the projected return of the portfolio relative to the funding objectives of the plan.
Some plans find it appropriate to retain an investment manager for some (or all) of the plan’s investments. A Committee may have primary responsibility for evaluating and making recommendations regarding candidates to serve as investment manager(s), or the Committee may be delegated the task of actually making the selection. The Committee should be guided by the standards of prudence in performing these tasks. Once an investment manager has been designated to serve, the investment manager is primarily responsible for its decisions. Nonetheless, Committee monitoring is essential because the Committee remains responsible to prudently monitor performance, and if appropriate, to replace an investment manager. To assist the Committee in its review and monitoring of an investment manager’s performance, many Committees have found it useful, if not imperative, to obtain assistance from investment analysts.
Participant-Directed 401(k) Plans
A common plan design is one that includes employee elective deferral contributions (i.e., “401(k) contributions”). ERISA section 404(c) provides that, under certain circumstances, the plan sponsor and plan fiduciaries are insulated from the consequences of the participants’ investment decisions. The relief provided by ERISA section 404(c) is often sought by 401(k) plan sponsors, and such plans are commonly referred to as a “participant directed 401(k) plans.” In order for a plan’s fiduciary to limit its liability under these rules, the plan must include the following requirements:
- Participants must have the opportunity to choose from a range of investment alternatives that provide the ability to diversify their investments;
- Participants must be able to give investment instructions with a frequency that is appropriate in light of market volatility of the investment alternatives; and
- Participants must be able to obtain sufficient information to make informed investment decisions.
This is a general overview of the ERISA section 404(c) requirements. The Department of Labor has provided more detailed guidance, particularly in DOL Regulation section 2550.404(c)–1. Any Committee with investment responsibility for a participant directed 401(k) plan would be well advised to become familiar with this guidance.
Suggested Administrative Practices of a Committee
Monitoring of Actions Taken
As noted above, a Committee may allocate non-trustee responsibilities under the plan and retain service providers for the plan. Before reaching any decision regarding the delegation of authority or the retention of a service provider, the Committee should diligently explore the options and exercise due care in reaching a decision. Subsequently, the Committee should monitor the actions taken by its delegates and by plan service providers, as well as the performance of the plan trustee and any investment manager(s) retained for the plan.
Special care should be taken if the Committee decides that a change in a service provider, a custodian, a trustee, or an investment platform is appropriate. Not only are the general fiduciary obligations implicated, but also recently enacted federal legislation (the Sarbanes-Oxley Act) which imposes specific obligations and restrictions on the plan’s administrator when participants are restricted from their normal right to direct or diversify assets in their accounts. Careful planning is in order to provide timely notice to participants and to make the transition as smooth as possible.
Making and Recommending Changes as Appropriate
A Committee should expect to make changes in plan operations and to offer recommendations regarding plan amendments when such changes appear to be in the best interests of the plan’s participants and their beneficiaries. In addition, a Committee would be well advised to keep itself informed of important developments in the laws governing the plan and of general business conditions which might affect plan operations and procedures. This task may be accomplished with the assistance of outside agents such as lawyers, accountants and investment professionals. While the plan sponsor generally bears the responsibility to amend the plan to maintain compliance with applicable law, a Committee generally has the direct authority to implement changes with respect to plan operations and procedures.
Holding Regular Meetings
A Committee should expect to hold meetings regularly. There is no specific legal requirement as to the frequency of meetings. In our experience, Committees have often found that regular quarterly meetings are appropriate to address the issues that arise in the course of administering a plan. Preparation of an agenda for each meeting allows for input from other personnel involved in plan operations. The Committee might invite operational or other personnel to attend a meeting to address particular matters, providing an opportunity for issues to be raised by the various plan “stakeholders” for timely consideration by the Committee.
In these meetings a Committee may, as appropriate, review items such as the following:
- the level of participation in the plan;
- the general plan operations;
- the overall service provider activity;
- any government reports and disclosures to participants (for example, the annual Form 5500 and the Summary Plan Description);
- the classes of investments offered and the investment performance of each;
- any changes in investment philosophy and approach;
- the level of participant diversification in investment alternatives;
- any benefit claims and appeals brought by participants;
- compliance with legal requirements and addressing changes in the law; and
- the current plan benefits and the business climate.
Addressing Potential Conflicts of Interest
The members of a Committee must permit the plan’s interests to predominate in the performance of their duties on the Committee. Employees of the plan sponsor, including plan participants, may serve as members of the Committee, so long as they and all members of the Committee remain cognizant of the Committee’s responsibility to act for the exclusive benefit of all participants (and beneficiaries) with respect to the plan.
If an action directly involves a Committee member’s particular interest under the plan, the member should recuse himself or herself from the Committee’s consideration of the matter. A clear example of such a conflict would be a Committee member’s claim for benefits under the plan that has been referred to the Committee for determination. In any case in which there may be a conflict of interest on the part of a Committee member with respect to a particular matter, it is advisable for the Committee to consult with legal counsel before any decisions are made.
Maintaining Adequate Documentation
The Committee should document with minutes all meetings held and all actions taken. The minutes of Committee meetings do not need to be lengthy. An identification of the agenda item, a summary of the discussion and an indication of the action, if any, which was determined, is adequate. The Committee may wish to submit the minutes in draft form for review by legal counsel (either in-house or outside) before adoption by the Committee. Counsel’s input is also advisable with respect to such sensitive issues as the confidentiality of participant information.
One essential function of this documentation is as an aid to demonstrate (should the need arise) that the Committee acted in a prudent manner. Documentation of the steps that were taken in reaching a decision, including consultations with advisors and experts as appropriate, can serve to demonstrate “procedural prudence.” Case law involving claims of fiduciary breach often focus on the whether the fiduciary took the steps that a prudent person would have taken in reaching the decision in question. The same case law indicates that a fiduciary who can demonstrate procedural prudence generally fares much better than one who cannot.
Additionally, the Committee should regularly review not only the plan document, but also important ancillary documents such as the Trust Agreement, the investment policy, the loan policy, the QDRO procedures and the rules governing the operation of the Committee. These materials are important components of proper administration of a plan and should be periodically reviewed and amended as necessary and appropriate.
Expenses associated with the investment alternatives available under the plan, as well as various administrative costs associated with the plan, can have a significant impact on the rate of return of plan investments. In this regard, the Committee should be guided by the standards of prudence described above. Accordingly, the Committee is obliged to identify all the charges that will be incurred by the plan in order to assure that all such charges are reasonable in light of the services provided and the cost of available alternatives. The Department of Labor has been placing increasing emphasis on the issue of expenses charged to plans. Therefore, careful consideration of this matter is warranted.
This is only a brief summary of the basic principles of fiduciary responsibilities required by ERISA in the context of a plan sponsor’s delegation of authority to a Committee. Many other issues may be relevant to the operation of a Committee, such as mandatory notices and disclosures, plan trustee responsibilities, specificity regarding prohibited transactions with a party-in-interest, and possible limitations of fiduciary liability through the use of insurance or indemnification. Many companies face additional requirements not addressed here, including requirements specific to companies which offer company stock as an investment option to participants. To ensure full compliance with ERISA, a company should give due consideration to the specific administrative practices of their plan fiduciary.