Heyl Royster


Heyl Royster


Fiduciary Obligations Of Employee Benefit Plan Sponsors


If you receive this newsletter, chances are you own a company and/or hold a high-level position within a company. More likely than not, that company offers some variety of employee benefit plans. These benefits may include pension plans, profit sharing plans, 401(k) plans, or so-called "welfare plans" (i.e. group health benefit plans, long and short term disability plans, and other non-pension benefit arrangements). Regardless of the type of employee benefit plan offered, most plans are governed by a federal law entitled the Employee Retirement Income Security Act ("ERISA"). ERISA establishes minimum standards for most voluntarily established pension and health plans in private industry to provide protection for the individual employees enrolled in these plans. Included in these standards are strict fiduciary obligations for those who manage and control plan assets.

ERISA requires a named fiduciary with the authority to control and manage the operation and administration of an employee benefit plan. This named fiduciary must adhere to the "prudent person" rule. This rule establishes that, in the administration of the employee benefit plan, the prudent plan sponsor must exercise: 1) the duty of care; 2) the duty to use skill; 3) the duty of loyalty; 4) the duty to follow documents; 5) the duty of fairness; and, 6) the duty to avoid prohibited transactions.

With respect to the duty of care, a plan fiduciary must exercise the care that a reasonably prudent person would exercise under the circumstances. This entails engaging in (and documenting) informed deliberations regarding plan decisions. It also includes careful investigation in the selection of core plan investments. This duty may also require delegation of investment decisions to a qualified designee and then monitoring of that designee's performance. A plan fiduciary must exercise this duty of care with respect to diversification of plan-asset investments, administrative expenses, and qualified default investment alternatives (i.e. default investment strategies for plan participants that do not control their investment decisions). The procedural process by which a plan sponsor conducts this oversight is as important as the end result.

A plan sponsor is also required to exercise the level of skill a reasonably prudent person would exercise under the same circumstances. The plan sponsor must either possess or obtain this skill set. In some instances, this may require the use of outside expert advice in the management of the plan.

In order to comply with the duty of loyalty required of plan sponsors, the sponsor must act with the exclusive purpose of providing benefits to participants and beneficiaries of the plan. Closely related to this requirement of loyalty is a duty of fairness. This means that plan sponsors cannot manage plan assets in a manner that is self-serving or that benefits only certain of the plan participants. It is worth noting that intent is not required to violate this duty– in other words, a plan sponsor can violate this duty even if he or she did not intend to manage assets in a manner which provided unequal benefits to plan participants.

Closely following the duties of loyalty and fairness is the duty to avoid prohibited transactions. In instances where the plan sponsor is also a beneficiary, conflicts of interest can sometimes arise. This presents a special problem and often times the use of independent advisors is necessary to avoid potential complications. Plan sponsors should also avoid the payment of fees related to the management of plan assets to parties with an interest in the plan. When expert advisors or vendors are utilized in the management of a plan, it is important that they be independent of the plan and its participants. It is also worth noting that ERISA imposes specific obligations of disclosure in certain instances.

Plan sponsors are also required to make plan decisions based in conformity with documents. Plan documents and those documents related to the plan control should be consulted in asset management decisions. In order to comply with this duty, organizations and plan sponsors should develop and adhere to a written investment policy. However, an investment policy should not be overly stringent or so detailed so as to prevent a reasonable degree of flexibility in the management of plan assets.

While ERISA does not require a committee to fulfill the fiduciary obligations of the plan sponsor, a committee is typically preferable. In such instances, committee members should consist of prudent, responsible persons who have the willingness to learn, intelligence to understand, and ability to question. Recommended committee personnel include a director of employee benefits, director of human resources, or a CFO of an organization.

Failure to adhere to the strict fiduciary obligations imposed by ERISA can lead to costly and potentially embarrassing litigation for the organization and/or plan sponsor. If your organization finds itself involved in such litigation, the use of experienced and effective legal counsel can mean the difference between a favorable result and a game-changing outcome. The attorneys of Heyl, Royster, Voelker, & Allen, PC have experience in ERISA litigation and can be a critical resource for any organization that faces litigation over potential non-compliance with the fiduciary obligations imposed by ERISA.