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Avoid Fiduciary Risk Q&A
Last Updated: August 01, 2012
After our recent Educational Series webinar on Avoiding Fiduciary Risk Chase Tweel, J.D., LL.M., a Pension Consultants ERISA Analyst responded to questions. See what he had to say below. Additionally, if you missed the live webinar, you can watch the recorded webinar here.
Question: Our document requires us to make employer’s stock available as an investment option. You mentioned earlier that following plan documents is a fiduciary duty, but it is also a duty to be prudent. It would be imprudent and/or disloyal to allow participants to invest in company stock under certain circumstances, so what should we do?
Chase: Well, we’ve seen many instances of the duties of prudence and the duty to follow plan documents actually conflict with each other, especially in the context of employer securities as an investment option. This is really a difficult issue because it can put plan fiduciaries between a rock and a hard place. Simply put, if you have to make a choice between acting in the best interest of the participants, and acting prudently and following the terms of the plan, generally speaking it’s better to err on the side of being prudent than following a plan document provision, especially if the circumstances dictate that it would be just completely imprudent to leave employer stock in the plan if this is an option.
For instance, if the company insiders and fiduciaries have insider knowledge that the value of company securities is going to completely deteriorate in the coming weeks, leaving the stock as an investment option would clearly be imprudent. So, in that situation, it would be best to disregard the plan document.
Now, as a plan design matter for plans that offer employer securities, a good solution is to not put plan fiduciaries in a difficult place of having to pick one fiduciary duty over the other. You can achieve this by giving the plan administrator and fiduciary the authority to remove the employer securities investment option at their discretion.
Question: Our plan says that the chief executive officer is the trustee of our plan. The CEO also serves on our 401K committee. Is this allowed?
Chase: Yes, it’s allowed. One of the basic tenets of ERISA’s fiduciary laws is that individuals can wear multiple hats. A person can fulfill multiple fiduciary roles, so in this case, the CEO can fulfill the role as trustee and as a fiduciary to the plan as a committee member. The CEO may often wear a settlor hat, acting as the CEO of the company, making business decisions on behalf of the plan. So in this instance, you’re going to see the CEO, conceivably, interchanging three different hats, oftentimes with very blurry lines in between which particular role is being assumed at any given time.
Now, there’s not a clear answer to whether or not that’s a sound practice. I will have to say this, the smaller the company, the less significant the risk would be of having somebody such as the CEO wearing so many hats with respect to the plan and the business.
Now, the larger the company, the more complex the plan and the more participants or beneficiaries that are affected. In that instance, it would be more urgent to have a governance structure that does not put the CEO in the position of wearing any fiduciary hat, much less wearing multiple fiduciary hats, as a trustee and as a committee member.
Question: You talked a lot about the importance of plan documents. How do you go about organizing all of those documents?
Chase: The first step, of course, is talking to your document provider and making sure that you have the most recent versions of the summary plan descriptions, summary of material modifications, adoption agreements, and basic plan or master plan documents, as well as all required legislative amendments, and all discretionary plan amendments. You’ll want to make sure that you have all the current required documents. It’s also a good practice to make sure that you have other items, such as termination letters, ancillary documents to the plan (such as QDRO and loan procedures) all organized, both electronically and on paper.
And also, in addition to having current documents, it is important to have plan documents that existed for your plans prior to statements and/or mergers and conversions. A historical record is very important because there are a handful of principles as well as those under ERISA and the tax code that require document retention and historical maintenance of plan documents.
Question: I have someone here that says they’re not sure they have a formal investment policy statement. How would they go about determining that?
Chase: If you’re not sure if you have an investment policy statement, the first thing to do is to look at your plan document files or ask the supervisor if the plan has implemented and established a policy statement. If the answer is yes, then the best thing to do is to review it, revise it, and have a third party investment adviser review and update it as needed. If there’s no investment policy statement, then it is not necessarily a good thing, so there is an opportunity to make it right. If you find that there has not been an investment policy statement it is advantageous to retain an investment adviser to craft one.
And you know, just having an investment policy statement is not enough. This is a lesson we learned in Tussey v. ABB. So once you’ve established or reviewed and updated your IPS, then it’s very important that all subsequent decisions made with respect to investments be continually reviewed against the investment policy statement and the IPS needs to be continually revisited and updated in light of changes to circumstances or changes in the market and other realities.
Question: You mentioned a court case that pertains to a point of clarification — the Cigna Corp. versus Amara. You said that plan sponsors should take care to ensure that all plan related items are accurate, not just the SPDs and the SMMs. What is that? What exactly does that mean?
Chase: Well, when I made the comment that the Cigna Corp. could have a more far reaching effect than just the accuracy of the SPDs and SMMs, I was referring to any document that relates to plans, but clearly is not a “plan document.” And really, if you think about it, this is a big category of items. There are so many plan related documents that could potentially give rise to claims in equity such as a detrimental reliance claim. This would include enrollment kits, distribution forms, fee disclosures, quarterly statements, and all benefit statements. These are types of items that are even farther removed from the concept of a plan document than the SPD is.
Nonetheless, we can still put them in the same category of plan related information—it doesn’t matter that it has nothing to do with the plan provisions. But the fact that participants may take that information, and then potentially rely on it to their detriment, gives rise to the potential for participants to use that as the basis for an equitable relief claim out of ERISA Section 502(a)(3), just like the claim brought by the participants to Cigna Corp. versus Amara.
So simply put, careful plan oversight is needed, not just to ensure accuracy and required statutory summaries of plan provisions, which is what an SPD is, and what the fact that Cigna Corp. dealt with, but with anything that had to do with the plan that is given to participants or beneficiaries.
Question: We have an owner/founder who is neither an employee nor a member of the board, but he has attended retirement committee meetings. I’m not sure if, off the top of my head, he’s a formal member of the committee, but what are the implications of his participating on the committee?
Chase: The idea of the non employee founder participating and being that hands on with the administration’s plans is interesting. If I had to guess, that individual is not named formally as a main fiduciary or as a member of the committee, but check your plan documents. Also, check your committee charter, if you have one. If the individual is not specifically named, an important concept under ERISA’s fiduciary principles to keep in mind is the functional nature of fiduciary status.
So if you do happen to find that this individual is not named anywhere or appointed anywhere, the mere fact that he or she is attending the meetings, undoubtedly participating in the administration of the plan and participating in fiduciary decision making, then that person, regardless of whether or not they’re formally appointed or named, is a fiduciary under ERISA.
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