Article contributed by Harrison Taylor, Ellenoff Grossman & Schole LLP
In September, the Employee Retirement Income Security Act (“ERISA”) turns 50. Congress enacted ERISA, in part, to protect employees’ retirement assets from employer theft and mismanagement.
To do that, ERISA imposes obligations on the fiduciaries of plans subject to ERISA, which includes, among others, all 401(k) plans, health plans, and many severance plans.
For purposes of ERISA, a fiduciary is generally any person who exercises discretion in administering a plan or has the authority to manage plan assets. ERISA’s duties include loyalty, prudence, diversification, adherence to plan documents, and avoiding “prohibited transactions.”
While much has changed in how courts interpret and apply ERISA, ERISA and the fiduciary obligations it imposes remain unchanged and are as relevant as ever for employers.
Over the last 50 years, the United States Department of Labor has promulgated numerous regulations, rulings, and other forms of guidance that remain applicable and govern much of how the employee benefits subject to ERISA are operated today. An additional enforcement element that has become much more prevalent in the last 20 years is an aggressive plaintiffs bar.
As ERISA’s complex regulatory framework developed over time, the plaintiffs bar has developed innovative causes of action challenging a plan fiduciary’s compliance with their ERISA duties and feasted on the associated fees. Who could blame them? ERISA is, unsurprisingly, a plaintiff-friendly law.
In addition to some of the headline-grabbing verdicts against employers such as Ruane Cunniff & Goldfarb (over $124 million) and General Electric ($61 million) for 401(k) plan fiduciary violations, ERISA allows courts to award attorneys’ fees in many cases without requiring a party to prevail on all of the claims raised.
This makes bringing ERISA claims cheap for plaintiffs and expensive for defendants, who are often the employers. While the original wave of fiduciary litigation generally targeted plans with assets in the billions of dollars, the developing trend is for the plaintiff’s bar to pursue smaller plans.
This makes the hospitality industry an attractive target due to its generally high turnover rates. And with social media, finding willing plaintiffs has never been easier.
One of the best ways to enhance compliance with ERISA’s fiduciary rules and minimize potential liability is to form a fiduciary committee to which the company’s governing body will delegate its fiduciary responsibilities regarding the discretionary administration of the plan and the management of its assets.
So, how does a committee increase the likelihood that a Company complies with ERISA? First, the committee is formed, and the Company’s managing body delegates the administration of its ERISA plans to the committee.
This separation is advantageous from a risk perspective because company management is generally assumed to be acting in the best interests of the company, whereas a committee composed of a diverse group of employees within the organization is more likely to act in the best interests of participants, which is what ERISA requires.
After formation, best practices dictate that employers educate committee members on their duties under ERISA. The committee then meets regularly to review the company’s qualified retirement plan performance and to manage and administer the plan by applying a prudent process.
This process limits risk by creating a record of fiduciaries complying with their fiduciary obligations, which often provides the documentation needed to dismiss many of the complaints filed by the plaintiff’ bar in the early stages of litigation.
One of the primary claims raised is that plan administrators have violated their fiduciary duties by allowing the plan to pay excessive fees from the plan’s assets. The excess fees can result from the plan being invested in a more expensive investment fund class or from the plan paying excessive fees for necessary services, such as recordkeeping services.
Importantly, ERISA doesn’t require plans to use the cheapest investments or the cheapest service providers. Instead, ERISA requires the exercise of prudent judgment.
A fiduciary exercising prudent judgment may decide that selecting hypothetical investment A is a better decision than selecting hypothetical investment B because even though investment B has lower fees, investment A has historically outperformed investment B and is more desirable to the plan’s participants.
The risk for many plans comes with the lack of evidence of process. A plan’s fiduciaries may properly select to include investment A in their plan investment lineup.
But, if an action is brought on behalf of a participant class claiming the plan paid excessive fees by selecting investment A and the plan fiduciaries can’t substantiate why they selected investment A over investment B (e.g., through documentation such as committee minutes), a court is more likely to allow the suit to survive a motion to dismiss.
Once ERISA litigation survives a motion to dismiss, the cost of the litigation increases substantially because the plaintiffs will then be entitled to engage in obtrusive and expensive discovery.
As ERISA’s 50th anniversary approaches, it’s an opportune moment for employers to reflect on their compliance practices. By taking stock of their current compliance and ensuring that fiduciary responsibilities are being met, employers can position themselves to minimize risk and continue delivering ERISA-compliant benefits to their employees for the next fifty years and beyond.
Harrison Taylor, counsel to Ellenoff Grossman & Schole LLP, focuses in the areas of executive compensation, employee benefits, and ERISA. Mr. Taylor’s experience includes counseling clients on executive compensation and employee benefits aspects of mergers and acquisitions, initial public offerings, and other transactions.
Mr. Taylor also regularly assists clients in designing and implementing employment, severance, deferred compensation, and equity incentive compensation arrangements. Mr. Taylor’s practice also includes representing public companies in preparing proxy materials and securities filings related to executive compensation matters. Mr. Taylor can be reached at (212) 370-1300 or htaylor@egsllp.com.
