Serving Two Masters - ERISA Fiduciary Duties Revisted After Enron

02/01/2002

ERISA requires plan fiduciaries to discharge their fiduciary duties solely in the interests of the participants and beneficiaries of the plan, and imposes personal liability on plan fiduciaries who fail to do so.  While these obligations have existed under ERISA for over 25 years, Enron has brought them into sharp focus and caused many employers to revisit the structure of, and the fiduciary responsibilities imposed on employees under, their 401(k) plans and other retirement plans.
 
Oftentimes an employee who acts in a dual corporate/fiduciary capacity finds himself in a conflict when he acquires information as an employee that he knows or should know could affect his fiduciary actions with respect to the plan and its participants.  One of Enron’s vice presidents who testified before Congress illustrated this dilemma when she acknowledged that she was aware of concerns about the company's accounting practices but apparently took no action to address the plan’s investments in company stock.  In response to her testimony, certain members of Congress are proposing that 401(k) plans that invest in publicly-held employer stock be required to retain an independent fiduciary.  In these situations, the fiduciary’s independence from the influence of the employer is considered vital to the plan’s participants.
 
However, new laws may not be necessary to impose this obligation on ERISA fiduciaries.  An employee-fiduciary arguably already has a fiduciary responsibility to retain independent counsel and advice when there is a possible conflict of interest that might prevent that employee-fiduciary from acting exclusively in the best interests of the plan's participants.
 
ERISA imposes no fiduciary liability or responsibility with respect to settlor functions.  The distinctions between fiduciary functions and non-fiduciary or so-called "settlor" functions, however, are not always easily discernible. Under ERISA, a person is a fiduciary to the extent he exercises any discretionary authority or control over the management or administration of the plan, or the management or disposition of the plan’s assets.  Although an amendment to a plan generally is a settlor function, discretionary actions to effect the plan amendment are often considered fiduciary functions.  Furthermore, some corporate actions are fiduciary functions, such as selecting plan committee members and monitoring them to ensure they are properly discharging their duties under the plan.
 
Under ERISA, fiduciaries can be held personally liable for any losses that may result to the plan from a fiduciary breach of duty.  Accordingly, companies and plan fiduciaries should re-examine their plans, the fiduciary duties and obligations imposed on employees, and the indemnification or fiduciary liability coverage which may exist to protect the fiduciaries.  In some cases plan fiduciaries may need to retain outside counsel, independent of company counsel, to advise them regarding their responsibilities.
 
If you have any questions about the issues raised in this Client Alert or about ERISA’s fiduciary duties, please call any of the authors listed at the top of the page.

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