Publications

May 2001

Corporate Trusteeship: A Fiduciary Analysis

By Sheree R Tallerman, Geller Group Ltd.

The Employee Retirement Income Security Act ("ERlSA") requires that plan assets, including 401(k) employee salary deferrals and employer contributions, be used only to pay benefits to participants and their beneficiaries and to defray reasonable plan operating expenses. Accordingly, qualified plans under ERISA must establish trusts to hold all plan assets. The plan sponsor either manages the plan assets or delegates this responsibility to trustees named in the trust instrument or appointed by the plan sponsor.

ERISA Fiduciaries

A named fiduciary is identified either in the plan instrument or in accord with a plan provision whereby the plan sponsor identifies the fiduciary. Either an individual or an entity may be a named fiduciary or may become a fiduciary based on the actual functions they perform. A named fiduciary commonly achieves fiduciary status by bearing the title, or performing the functions, of a trustee.

Functions giving rise to fiduciary status include exercising any discretionary authority or control over plan management or exercising any authority or control over the investment management or disposition of plan assets. Furthermore, an individual or entity may become a fiduciary by rendering investment advice for a fee.

Administrative managers of the plan sponsor are usually fiduciaries because of their involvement in the daily operation of the plan. Inevitably, they exercise substantial authority and control over final decisions on benefit claims, plan design, plan asset investment, and the selection and retention of plan service providers.

Although ERISA empowers trustees with complete control over plan assets held in trust, trust investment decisions may be delegated to the plan's investment committee, the officers of the plan sponsor, or other designated investment managers. The plan trustee is not liable as a fiduciary for the investment decisions reached by others empowered to make them; rather, those individuals or entities that actually function as investment managers are. Nevertheless, if the agreement with the plan sponsor indicates that the plan trustee selects and manages investments, then the plan trustee will be held to the same liability standards as any other investment manager.

ERISA provides explicit exculpatory relief if plan trustees or the plan sponsor delegates the responsibility for investment decisions to a professional investment manager. No trustee will be held liable for acts or omissions of duly appointed professional investment managers. Nor are plan trustees responsible for the investment and management of plan assets under the control of professional investment managers. Trustees subject to the direction of the named fiduciary are called "directed trustees." Directed trustees will not be held liable for following the instructions of the named fiduciaries or their delegates (i.e., investment managers).

Personal Liability

ERISA offers plan fiduciaries, including employer representatives and trustees, significant protection against personal liability for investment decisions if they exercise reasonable care in the selection of an investment manager, provide the manager with a written statement of the fund's investment objectives, and periodically monitor the manager's investment performance.

Plan fiduciaries are personally liable for losses caused by their breaches of any of the fiduciary responsibilities, obligations, or duties imposed by ERISA. Additionally, plan fiduciaries may be liable for breaches of fiduciary responsibility committed by other fiduciaries, including directed trustees.

In most qualified plans, a mutual fund company, insurance company, or stockbroker has actual custody of the plan assets. Consequently, many plan sponsors believe that it makes sense to become a self-trustee, to save the cost of a trustee fee and avoid cofiduciary liability. ERISA fiduciaries presumably would accept personal liability for their own acts or omissions, but not for the acts or omissions of cofiduciaries.

Cofiduciary Liability

A fiduciary is liable for a cofiduciary's breach if: (1) he knowingly participates in or undertakes to conceal an act or omission of the other fiduciary, knowing the act or omission to be a breach; (2) he has enabled the other fiduciary to commit a breach by his failure to comply with the fiduciary duties; or (3) he makes no reasonable efforts to remedy a breach by the other fiduciary of which he has knowledge.

More importantly, a fiduciary is also liable for the loss caused by another fiduciary's breach if he enables the other fiduciary to commit the breach through his failure to exercise prudence or to otherwise comply with the basic fiduciary duties under ERISA. Such "non-active" trustees have been held liable for the acts of fiduciaries that have "actively" violat- ed their fiduciary duties because they failed to discharge their duties with the required care and diligence.