In our previous blog
in the Guide to Fiduciary Prudence series, we discussed the many roles and responsibilities involved in one’s role as a plan fiduciary. This post will discuss the risks inherent in this fiduciary position. Someone may be a fiduciary because of the role he/she in fact plays for a plan, even though he/she:
- May not know he/she is a fiduciary and did not intend to become one; and
- Within his/her contract with the employer or the plan administrator, stipulates that he/she is not a fiduciary.
It is clear that whether an ERISA fiduciary named within the plan or one deemed as such through his/her actions, various duties are required to be followed. Failure to comply with these duties—whether a failure by action or omission—may result in personal liability or maybe co-fiduciary liability, and if egregious enough, may even result in criminal liability. These forms of liability have been laid out, below:
The most important risk taken while serving as a fiduciary is opening oneself up to personal liability. Yes, as a fiduciary, you may be personally liable to the plan and participants for any breach that is a direct or indirect result of your improper actions. And because of this personal liability, you may be responsible for restoring any losses
to the plan, or for restoring any profits
made through improper use of the plan’s assets resulting from improper actions.
More specifically, consider the following scenario: Plan Administrator breached his duty of loyalty because he embezzled funds from the Plan. This is clearly a fiduciary breach. As a result of this breach, the Plan Administrator is required to restore the losses to the plan. If he received any profits from his actions, he must relinquish any and all proceeds or values gained and deliver those to the plan.
It’s important to note that not all issues of personal liability due to a breach are this straightforward. What about in the event NO financial harm occurs to the retirement plan as a result of the fiduciary’s breach? Even then—in the event of no financial loss to the plan participants—a breach still occurs, one which renders the fiduciary personally liable. But how can one be personally liable if it’s not a financial consequence to the fiduciary?
There are a number of ways that personal liability may be imposed upon a fiduciary beyond the fiscal losses associated with the breach. As previously stated, fiscal gains may also be a consequence, i.e., a fiduciary must return any profits he made through the use of plan assets. Additionally, equitable remedies may be imposed on the fiduciary. Specifically, an injunction may be enforced against a breaching fiduciary, and this injunction may remove a fiduciary from his present position, may restrict the fiduciary from serving in such a capacity over particular plans, and may go so far as to restrict a fiduciary from serving in such a position over all ERISA-governed plans.
Co-fiduciary liability is not separate from personal liability. Instead, it’s another way in which one can become personally liable to a benefits plan. All ERISA fiduciaries have potential liability for the actions of their co-fiduciaries. In the event co-fiduciary liability is triggered, all fiduciaries involved are jointly and severally liable to the plan for the breach.
So, if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary—the one who did nothing but allow the breach to occur—is liable as well. And furthermore, if your fellow fiduciaries are unable to pay, the harmed participants could seek compensation from you due to the joint and several liability. Essentially, the imposition of co-fiduciary liability deters a fiduciary from letting the bad acts of fellow fiduciaries go unnoticed. As such, it is extremely important to ensure ERISA compliance through your own acts while also being mindful of another fiduciary’s potential bad acts.
Although the most common, the liabilities resulting from an ERISA breach are not simply civil in nature. In fact, the labor law title of ERISA contains three criminal enforcement provisions for egregious fiduciary breaches, as explained below:
29 U.S.C. § 411
: Serving as a fiduciary or service provider of an employee benefit plan after being convicted of certain crimes, such as robbery, bribery, extortion, and embezzlement. The penalty for this violation is an up to $10,000 fine and/or five years imprisonment.
29 U.S.C. § 501
: Violating ERISA’s reporting and disclosure requirements. This provision punishes those who commit willful violations of ERISA’s reporting and disclosure requirements in Part 1 of Title 1. The penalty for this violation is an up to $100,000 fine and/or 10 years imprisonment for an individual.
29 U.S.C. § 511
: Coercive interference with a participant’s rights under an employee benefit plan. This provision intends to keep employers from terminating or harassing employees to prevent them from getting vested pension rights. Criminal sanctions may be imposed if the interference involves willful use of actual or threatened fraud, force, or violence. The penalty for this violation is an up to $100,000 fine and/or 10 years imprisonment for an individual.
Although the actions involved for such provisions to be imposed must be quite an extreme breach, it is important to know that such criminal liability has been considered available in the event of a severe failure to adhere to one’s fiduciary duties under ERISA.
All this talk about liabilities may leave fiduciaries thinking: “Well, I don’t want that to happen to me, what can I do to avoid this?” Remember to reread our article on fiduciary duties
, which emphasizes the importance of documenting processes to carry out ones fiduciary responsibilities. Furthermore, you can learn to limit these potential consequences through the establishment of oversight and procedures to ensure ERISA compliance. More on that will be addressed in our next post in this Fiduciary Prudence series: “Establishing and Operating a Committee Meeting To Ensure ERISA Compliance.”
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.