Strategies to Minimize Fiduciary Liability

This blog describes the various forms of liability fiduciaries are subject to and actions that can help minimize that liability.

Fiduciary Liability Explained

• In addition to criminal penalties, ERISA permits participants and beneficiaries to bring civil actions against a fiduciary who breaches duty
• The fiduciary is personally liable for any losses resulting from a breach
  • Any profits realized as a result of a breach must be restored to the plan
  • Any losses suffered by the plan must be made whole
• With the exception of the named fiduciary, a plan fiduciary’s personal liability to the plan is limited to the functions the fiduciary performs, or for which the fiduciary is responsible

Department of Labor Penalties    

• The Department of Labor (DOL) may assess a civil penalty equal to 20 percent of the applicable recovery amount in the event of a breach
• The DOL may, at its discretion, waive or reduce a penalty if it determines that the following occurred:
  • The fiduciary or individuals involved acted in good faith
  • It is unreasonable to expect the fiduciary or individuals involved to restore all losses without experiencing severe financial hardship
• Reduced penalties may apply if fiduciary files application with DOL under the Voluntary Fiduciary Compliance Program 

Co-Fiduciary Liability

• Any fiduciary who is aware of other fiduciaries’ actions that may violate legal standards must take all reasonable and legal steps to prevent such actions
• If a fiduciary takes all of the reasonable and legal steps to prevent a fiduciary breach but does not succeed in preventing the breach, then such fiduciary should not incur liability for the other fiduciaries’ actions if reasonable efforts to remedy the breach are undertaken

Breaches Before or After Being a Fiduciary

• A fiduciary cannot be held liable for a breach of fiduciary duty committed before becoming a fiduciary or after being a fiduciary
• Even though a fiduciary may not be liable for a breach, the fiduciary must take steps to remedy the situation if aware of the breach
  • Failure to do so might be considered a subsequent independent breach of fiduciary duty by the fiduciary

Individual Fiduciary Liability

• Named fiduciary is not liable for designated fiduciary’s acts and omissions carrying out fiduciary responsibilities
  • However, a named fiduciary would be liable if the named fiduciary fails to monitor designated fiduciary’s activities
• Develop procedures for monitoring such individuals or entities based on the needs for each plan
  • Make procedures flexible enough to be modified in the event of any changes affecting the plan 

Terminating a Fiduciary

• Must follow plan procedures to terminate responsibilities
• Must make sure another is prepared to assume those responsibilities 
• It is recommended that both the plan sponsor and the terminated fiduciary document the termination process, actions taken and steps to ensure smooth transition to the new fiduciary

Fiduciary Liability Insurance

• An insurance policy covering plan sponsor’s directors, officials, and fiduciaries
  • Must specifically cover ERISA claims
• Not the same as a fidelity bond—a fidelity bond protects the plan
• Fiduciary insurance protects fiduciaries and their personal assets from lawsuits alleging breaches of fiduciary responsibility
• Review or purchase a policy that provides broad coverage

Draft Investment Policy Statement

• Draft a written statement that provides the fiduciaries who are responsible for plan investments with set guidelines and general instructions about various types or categories of investment management decisions
• An investment policy generally does not include directions about the purchase or sale of a specific investment
• If hiring an outside consultant, condition such appointment on the implementation of an investment policy

Indemnify Fiduciaries

• The plan sponsor may offer to indemnify employees who are fiduciaries with respect to fiduciary suits that may arise under ERISA
• Examples of permitted indemnification agreements are:
  • Indemnification of a plan fiduciary by:
    • an employer, any of whose employees are covered by the plan, or an affiliate of such employer or
    • an employee organization, any of whose members are covered by the plan; and
  • Indemnification by a plan fiduciary of the fiduciary’s employees who actually perform the fiduciary services.

Education and Documentation

• Plan fiduciaries need to understand their responsibilities and obligations under ERISA
  • Create and implement a fiduciary training program
  • Develop worksheets to document and monitor roles and responsibilities
• Fiduciaries must follow written procedures that can demonstrate compliance with ERISA’s fiduciary standards

Hire Trustees and Investment Managers

• Fiduciaries and trustees may look to hire outside professional trustees and investment managers to make plan decisions
  • Potential liability exposure may be limited through this course of action
• Fiduciaries and trustees must carefully monitor professional trustees and investment managers

Hire Investment Adviser

• Fiduciaries may hire an investment adviser to provide recommendations related to investment options
  • Investment adviser considered a co-fiduciary
• Fiduciaries must routinely monitor investment advisers

Hire Lawyers, Consultants, and Administrators

• Lawyers, consultants, and third-party administrators (TPAs) might assist their clients with the practical implications of the plan sponsor being a fiduciary by doing the following:
  • Helping plan sponsor understand its responsibilities
  • Assisting with hiring a professional trustee or investment manager
  • Recommending the indemnification of certain fiduciaries
  • Recommending the purchase of fiduciary liability insurance

Establish Participant-Directed Accounts

• In general, fiduciaries are not liable for any losses due to a participant’s investment choices if they are deemed to be compliant with ERISA Section 404(c) and regulations promulgated thereunder

Conduct Periodic Audits

• Conduct periodic self-audits to ensure that the plan is being administered in accordance with the terms of the plan document, ERISA and the Internal Revenue Code
• Be aware of the warning signs that indicate when a self-audit would be appropriate
• Annual financial audits should not be viewed or relied upon as comprehensive compliance audits 

SOURCE: RPAG
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