Of Retirement Plan Trustees -- And What To Do About It
article is supplemented and updated by more recent posts that
consider the Department of Labor fee disclosure rules (see “Protecting
Retirement Plan Fiduciaries”) and case law that expands
fiduciary liability (see “Expanded
Liability for Retirement Plan Fiduciaries”)
Employee Retirement Income Security Act of 1974 ("ERISA")
generally governs qualified retirement plans (pension plans, profit
sharing plans, 401(k) plans and their variants).
ERISA imposes certain duties and responsibilities on the
"fiduciaries" who are responsible for the administration
of those retirement plans.
defines the term "fiduciary" to include any person who:
any discretionary authority or control with respect to plan
investment advice as to plan assets for a fee.
discretionary authority or responsibility in the administration
of the plan.
definition usually covers the employer that sponsors the plan, plan
administrators, members of any administrative committee, investment
managers and plan trustees.
trustee of a qualified retirement plan is the entity or group of
individuals who hold the assets of the plan in trust.
Trustees are either designated in the plan document or
appointed by another fiduciary, typically the employer who sponsors
the plan. The trustees
usually have exclusive authority and discretion over the management
and control of plan assets unless the plan document provides
otherwise by, for example, delegating control over investment
decisions to an "investment manager" or to participants in
have certain general duties with respect to the way they manage and
administer the qualified plan for which they are responsible.
Those duties include the following:
1. Trustees must administer the plan in accordance with the
documents and instruments governing the plan.
Trustees must administer the plan for the exclusive benefit
of plan participants and their beneficiaries.
Trustees must act in accordance with the standard of care
established under ERISA, that is, the Acare, skill, prudence and
diligence . . . that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims
Trustees must diversify plan investments in order to
minimize the risk of large losses (unless it is clearly prudent
not to do so).
Trustees must not permit the plan to engage in the
"prohibited transactions" described in ERISA, which
include, subject to specific statutory and administrative
exemptions, any sale, exchange or transfer of assets, goods of
services between the plan and any "party in interest"
(employer, employee, fiduciary, persons providing services to
the plan and related parties).
Trustees must value qualified plan assets at least
annually at "fair market value."
must not engage in transactions which violate the following
specific ERISA restrictions on fiduciary conduct:
and other fiduciaries cannot deal with plan assets for their
own account (i.e.,self-dealing).
and other fiduciaries are not to act in a transaction
involving the plan on behalf of a party whose interests are
adverse to those of the plan (i.e., engage in conflicts of
and other fiduciaries are not allowed to receive
compensation from any party dealing with the plan in
connection a transaction involving plan assets (the
who receive "full-time pay" from an employer that
sponsors a plan may serve as trustees, but they are not
entitled to receive compensation from the plan for acting as
trustees are permitted reasonable expense reimbursement.
a trustee breaches any of the responsibilities, obligations, or
duties imposed by ERISA, the trustee will be personally liable to
reimburse the plan for any losses resulting from the breach.
The trustee will be responsible for restoring to the plan
any profits that he or she made through the use of plan assets.
A civil action may be brought by a participant or
beneficiary, or by another fiduciary.
In addition, the fiduciary will be subject to equitable or
remedial relief as a court may deem appropriate, such as removal
of the fiduciary. Even
if a trustee delegates some of his or her fiduciary duties to
others, the trustee is not completely relieved of fiduciary
responsibilities because the trustee is obligated to monitor the
performance of those to whom the duties have been delegated.
a trustee is held liable for breach of fiduciary duty, by court
order or settlement with the Department of Labor, a civil penalty
equal to twenty percent of the amount of such liability will be
penalty may be waived or reduced if the trustee acted reasonably
and in good faith.
as some trustee duties may be allocated to others by the plan
document, additional duties may be allocated to the trustees.
Trustees are frequently designated as being responsible for
loans to participants are not treated as prohibited transactions
under ERISA if the following conditions are satisfied:
Loans are available to participants and beneficiaries on a
reasonably equivalent basis;
Loans are not made available to highly compensated
employees in an amount greater than the amount made available to
Loans are made in accordance with specific provisions that
are set forth in the plan;
Loans bear a reasonable rate of interest; and
Loans are adequately secured.
the extent the trustees are required to enforce a standard set
forth in the plan document for granting (and denying) participant
loans, they may be involved in fact-finding relating to a
particular loan application and in applying the loan
"policy" on the basis of such fact-finding.
This type of decision making can always be second guessed
by a participant whose loan application is rejected.
Alternatively, all participant loans that meet the
statutory criteria can be granted regardless of the applicant's
would remove the trustees from the duty of making specific
decisions on who should be granted plan loans at the expense of
losing control over the use of loan proceeds by participants.
of Labor regulations require Athe basis on which loans will be
approved or denied to be included in a written "loan
program" which comprises a part of the plan, although it may
be set out in a separate document.
The loan program also must include:
The identity of the persons authorized to administer the
participant loan program (typically the administrative committee
or the trustees);
A procedure for applying for loans;
Limitations (if any) on the types and amounts of loans
The procedures under the program for determining a
reasonable rate of interest;
The types of collateral that may secure a participant loan;
The events constituting default and the steps that will be
taken to preserve plan assets in the event of such default.
Department of Labor's loan program requirements address the
primary concerns of the trustees in administering participant
loans: the basis for granting and denying loans, the procedure for
determining a reasonable rate of interest and security for
participant loans. Following
a written loan program (as well as the plan document) will go a
long way to providing a defense to the trustees in the event their
denial of a loan application is contested.
determination of a reasonable rate of interest for a particular
participant loan may require a survey of several local banks to
determine what rate of interest they would charge for similar
loans. This is
because the Department of Labor has never prescribed an interest
rate or formula for determining a reasonable rate of interest,
although opinion letters have observed that a rate equal to the
"prime rate" plus one or two percent would be reasonable
in particular circumstances.
loans also must be adequately secured, and the participant's
vested accrued benefit under the plan may be assigned as security.
However, no more than fifty percent of the present value of
a participant's vested accrued benefit may be used as security for
a plan loan. Consequently,
for loans of more than fifty percent of a participant's vested
accrued benefit (which are permitted only for loans of up to
$10,000), security in addition to the participant's benefits in
the plan (such as a pledge of personal assets) will be required.
Mitigation of Liability
trustee should consider various means of limiting personal exposure
for claimed breaches of fiduciary duty.
Generally, provisions in a plan document which relieve
trustees from liability for breaching their fiduciary duties are
void under ERISA. This
means that the exculpation and indemnification of trustees by the plan
is prohibited. However,
the indemnification of trustees by the employer which sponsors the
plan is permitted. Indemnification
of trustees who are officers or directors may already be provided in
separate documents, such as the company's by-laws.
approaches to the mitigation of fiduciary liability include:
fiduciary liability insurance which covers liability and losses
resulting form the acts or omissions of plan fiduciaries.
This coverage should not be confused with the
required fidelity bond, which protects only the plan.
Such fidelity bonds permit recourse by the insurer
against a trustee who engages in a breach of fiduciary duty.
responsibility for investment decisions to an investment
manager. This can
be accomplished by action of the employer taken in accordance
with any provisions relating to investment managers set forth in
the plan document.
Allocate certain duties to others in accordance with plan
procedures so that the scope of the trustees' duties is reduced.
For example, an individual who is not a trustee may be
designated as a fiduciary responsible for the participant loan
participants to make their own investment decisions as to their
accounts in the Savings Plan.
If participant investment direction is implemented in
accordance with Section 404(c) of ERISA, the trustees will be
relieved of liability for the participant's investment decisions
as to the participant's own account.
Section 404(c) of ERISA requires the plan to provide
participants a choice among at least three investment
alternatives which are diversified and have materially different
risk and return characteristics.
For participants with smaller accounts, the plan will be
required to provide a "look-through" vehicle (such as
mutual funds, collective trust funds, fixed rate investment
contracts of an insurance company, pooled insurance company
investment accounts and the like) in order to assure the
requisite degree of investment diversification.
procedural prudence by conducting regular trustees' meetings,
keeping minutes of the meetings and documenting the basis for
decisions made, particularly investment decisions and decisions
concerning applications for participant loans.
Golan & Christie LLP
70 West Madison St.
Chicago, Illinois 60602