The highest duty under the law is to act as a “fiduciary,” which means a responsibility to act in the best interest of others, even if doing so is inconsistent with your own best interests. The Employee Retirement Income Security Act of 1974 (“ERISA”) imposes such a duty on plan administrators and others under a variety of circumstances.

Recently, there has been an increase in the number of ERISA lawsuits alleging breach of fiduciary duty, highlighting the importance of knowing when you are a plan fiduciary, and understanding what you must do in order to protect yourself from personal liability. Some fiduciaries believe that they do not have fiduciary duties, because a plan allows participants to direct their investments or because they are not named as a fiduciary in the plan documents. However, they may be surprised to learn that they are subject to fiduciary duties and are personally liable for losses resulting from a breach of those duties.

On April 2, 2008, the Department of Labor (“DOL”) submitted a friend of the court brief in the appeal of Hecker v. Deere & Co., Case No. 06-C-719-S (W.D. Wisc., June 21, 2007) to the 7th Circuit Court of Appeals. The plaintiffs in Deere are participants in the Deere & Co. 401(k) plan. They brought suit alleging a breach of fiduciary duties based on Deere’s lack of knowledge regarding the fees paid on the investment options, which arguably caused the Plans to pay excessive fees, and for Deere’s alleged failure to disclose fee information to the participants. They also allege that the plan trustee and plan manager owed fiduciary duties to the plan’s participants regarding the selection of available investment options. According to the friend of the court brief filed by the DOL, there was a fiduciary duty relating to the selection and monitoring of investment options, disclosure of material information to participants, and the existence of “functional fiduciaries,” who are not otherwise fiduciaries according to the plan documents.

Section 404(c) of ERISA relaxes the fiduciary duty where a plan allows participants to direct their investments. There is no fiduciary duty to the extent that a loss or breach is a direct or necessary result of the participant’s exercise of control. Nonetheless, the DOL has always maintained that 404(c) does not protect a fiduciary for his imprudent or disloyal selection or monitoring of investment options in a 404(c) plan. Therefore, if the loss was a result of a plan participant’s failure to diversify, 404(c) would relieve the fiduciary for breach of fiduciary duties regarding diversification. However, if the loss was due to the imprudent selection or monitoring of investment options, such as the selection of investment options that charge excessive fees, 404(c) will not relieve fiduciaries of liability for a claimed breach of their fiduciary duties.

In addition to the duty of the fiduciary to prudently select and monitor investment options, a fiduciary may have a duty to disclose certain information. While ERISA requires certain disclosures to participants, the DOL takes the position that the list of required disclosures is not exhaustive. Fiduciaries may also have a duty to disclose material information under their duties of prudence and loyalty, even if the participant does not specifically request the information. This includes information that the participant needs to know in order to make an informed decision, but to which he or she does not otherwise have access. Whether the duty to disclose is satisfied by disclosing only that which is required under ERISA, or stems from the fiduciary’s duties of prudence and loyalty and is more expansive, depends upon the facts and circumstances of each case.

Finally, the DOL contends that a party may be a functional fiduciary under ERISA as a result of its actions, even if it is not a fiduciary under the terms of the plan. Someone may be a functional fiduciary to the extent they:

  • Exercise discretionary authority or control over management of the plan or disposition of the plan assets;
  • Render investment advice for a fee or have the authority to do so; or
  • Have discretionary authority or responsibility in the administration of the plan.

Because failure to fulfill fiduciary duties can result in personal liability, it is important to know what your duties are and how to fulfill them.