Does your 401(k) plan provider accept its fiduciary obligation to follow U.S. Department of Labor guidance when serving as "directed trustee" of your plan? If not, you, as the employer and, therefore, the primary fiduciary responsible for your plan, potentially could be at risk for unwanted government audits and participant suits for breach of fiduciary duty under the federal pension law known as ERISA.
First, the basics. An employer typically maintains its 401(k) plan through a mutual fund family or major insurance company. In most instances, any such provider will offer "directed trustee" services as part of a turnkey 401(k) administration package. Such services usually are provided under the terms of a "boilerplate" trust agreement prepared by the provider.
Unfortunately, at least from the standpoint of the employer, the "boilerplate" trust agreement tends to be a one-sided document in which the provider seeks to minimize its fiduciary responsibilities under ERISA as a "directed trustee." In fact, the provider frequently takes the position that, because it is a directed trustee, it has no meaningful fiduciary obligations under ERISA, and, accordingly, it can follow any direction given by the employer (or other plan fiduciary) without having to inquire into the propriety of the direction.
Making matters worse, the typical employer does not review, let alone attempt to negotiate, the terms of the trust agreement. What such an employer perhaps does not realize is that by failing to do so, it is relinquishing valuable rights and almost certainly is violating its own fiduciary obligations under ERISA to plan participants and beneficiaries.
Defining Your Fiduciary Responsibilities
In particular, the U.S. Department of Labor recently has issued guidance that requires a directed trustee to satisfy certain minimum standards of conduct, as required by the U.S. District Court in In re Enron Securities Corp., Securities, Derivative & ERISA Litig., 284 F. Supp. 2d 511 (S.D. Tex. 2003), commonly referred to as "the Enron litigation." The guidance, set forth in U.S. Department of Labor Field Assistance Bulletin 2004-03, imposes numerous fiduciary responsibilities upon a "directed trustee."
First and foremost, the Department of Labor states in the Bulletin, rather emphatically, that "a directed trustee is a fiduciary under ERISA and must exercise its duties prudently and solely in the interest of plan participants and beneficiaries." Thus, in the aftermath of the Enron litigation, a directed trustee no longer can take the position that it does not have any meaningful fiduciary responsibilities under ERISA.
·An obligation to determine whether the instructions of another fiduciary (with authority to give such instructions) are permitted under the plan and to refuse to follow instructions that violate the terms of the plan;
·An obligation to review all pertinent plan documents to determine whether an instruction is proper;
·An obligation to refuse to follow the instructions of another fiduciary that are contrary to the terms of ERISA;
·An obligation to obtain assurances that a transaction or direction does not constitute or will not result in a "prohibited transaction" under ERISA;
·An obligation to take steps to prevent or to remedy a breach of fiduciary responsibilities by another fiduciary, if the directed trustee knows that such a breach is about to occur.
The problem faced by the average employer is that the typical boilerplate-directed trustee agreement does not require the trustee to comply with its fiduciary obligations under ERISA, as articulated by the Department of Labor in its Field Assistance Bulletin. As a fiduciary of its 401(k) plan, the employer has an obligation to require the directed trustee of its plan to comply with the requirements of applicable law.
Meeting Your Fiduciary Obligations
So what should an employer do to satisfy its fiduciary obligations? If it does nothing else, an employer should examine the trust agreement for its 401(k) plan and request that the directed trustee of the plan make appropriate modifications to comply with the requirements of the Field Assistance Bulletin. To the extent that the directed trustee refuses to make such modifications, an employer, consistent with its fiduciary obligations under ERISA, should consider shopping the trustee function with another provider. In most instances, an employer can change the trustee without changing the recordkeeper, which is likely to be an affiliate of the trustee, or any other aspects of the administration of the plan. In the end, it is the employer, as the primary fiduciary of its 401(k) plan that needs to act aggressively to ensure the directed trustee´s commitment to legal compliance.
About the Author
Adam B. Cantor is an attorney in the Corporate & Securities Group at Brown Rudnick Berlack Israels LLP. He practices primarily in the areas of ERISA, tax law, employment law, executive compensation and business succession planning. He advises a diverse group of public and private companies, partnerships, limited liability companies, hedge funds and nonprofit organizations on complex issues arising in these areas.
Mr. Cantor can be reached at 212.209.4896 or at acantor[at]brownrudnick.com
Brown Rudnick´s Employee Benefits & Executive Compensation Group represents businesses at all stages of development, including emerging growth companies, public companies and large private institutional businesses. The Group provides a wide range of legal and consulting services to cover the many aspects of employee benefits law, including design, implementation and administration of benefits plans and programs. In this complex area, the Group provides an aggressive, results-oriented approach to meet the specific business goals of clients.