The Employee Retirement Income Security Act of 1974 (ERISA) regulates most private employee benefit retirement and welfare plans. This statute's purview is vast; it governs employer-sponsored defined benefit and defined contribution retirement plans and an array of welfare plans.
Under ERISA, a plan fiduciary is an entity that exercises authority or control over the management or disposition of plan assets. Within the ERISA context, "fiduciary" is a functional title rather than a job title. A fiduciary need not know that they have assumed fiduciary status to be liable for a potential fiduciary breach. If one fiduciary fails to meet their responsibilities, other fiduciaries may be held accountable, even if they were not directly involved. This is known as "joint and several liability."
What are a fiduciary's obligations under ERISA?
ERISA Section 404 and Section 2550.404a-1 of the Department of Labor's regulations outline fiduciary obligations. The provisions demand that a fiduciary:
- Act solely in the interest of the participants and beneficiaries, exclusively to provide benefits to them and defray reasonable expenses of the plan.
- Carry out their duties prudently.
- Follow the plan documents, except where the plan document conflicts with ERISA.
- Diversify plan investments to minimize the risk of significant losses.
- Pay only reasonable plan expenses.
How can a plan fiduciary ensure it is fulfilling its obligations?
- Differentiate between "fiduciary" and "settlor" functions. Not all functions related to employee benefit plans are fiduciary functions. Fiduciaries must carry out their duties in the best interests of plan participants. The administration of the plan is generally a fiduciary function. Settlor functions, in contrast, may be carried out in the best interests of the plan sponsor and may include adopting, amending, or terminating a benefits plan.
- Manage plan administration using well-documented, rigorous decision-making processes. The fiduciary duty of prudence is a process requirement. The fiduciary does not have a duty to maximize plan asset growth or minimize plan expenses absolutely. Instead, the fiduciary has the duty to administer the plan using reasonable, rational decision-making processes. "Prudent" processes cited in recent cases include reviewing quarterly reports, engaging an investment consultant, using a watch list and investment policy statement in decision-making, and actively monitoring underperforming funds.
- Follow the plan's terms—and design the plan to make that possible. If a provision is written into the plan and does not conflict with ERISA, the fiduciary is bound to follow the terms of each such provision to remain in compliance.
The Bottom Line
- The role of a fiduciary under ERISA is both critical and complex. Fiduciaries are responsible for managing the plan's assets and safeguarding the interests of the participants and beneficiaries. While the path to compliance with ERISA's fiduciary obligations may seem daunting, it is based on loyalty, prudence, and adherence to the plan's terms. By understanding and respecting these principles, fiduciaries can navigate their responsibilities.
- The essence of fiduciary duty under ERISA is about making informed, well-considered decisions that align with the best interests of the plan participants and beneficiaries.
The Jackson Lewis Employee Benefits Practice Group members can assist if you have questions or need assistance. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.