September 9, 2014

A Fiduciary’s Job is Important and How (article)

Hopefully, everyone in the benefits world knows that fiduciaries play an integral role in ERISA plans.  Further, most probably know that the laws for fiduciary standards historically were set in a case called Moench v. Robertson [62 F. 3d 553, 571 (1995)], and is commonly known as the “Moench presumption”.  In summary, the Moench presumption gives credence to a decision made by a plan fiduciary.  This presumption of validity may be turned on its head.


A decision was recently rendered by the Supreme Court in the case of Fifth Third Bancorp v. Dudenhoeffer (U.S., No. 12-751, 06/25/14).  The primary question addressed in this decision is, what is the appropriate standard of prudence that is to be used by a plan fiduciary specifically when employer securities are involved as an investment option? 


As background, the standards of conduct under ERISA require plan fiduciaries to carry out their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing 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”, i.e., the “prudent man standard of care” pursuant to ERISA §404(a)(1)(B).


Over time, various courts have addressed the appropriate standard of prudence that should be used in situations in which employer securities are, for example, in the case of ESOP, the sole investment; or, in the case of an individual account plan, one of the investments in the plan.  As an aside, plans with ESOPs that are invested strictly in employer securities are exempt from the diversification requirement otherwise required of plans subject to ERISA.


Progressively, the courts have developed a ‘presumption of prudence’ standard providing some degree of protection to plan fiduciaries.  In other words, plan fiduciaries are deemed to act prudently; and thus, it is incumbent upon the claimant to disprove this presumption of prudence.  As noted above, the pivotal case defining the presumption of prudence was Moench v. Robertson pursuant to which the Court determined that a plan fiduciary was deemed to act consistently with ERISA.


The Department of Labor has consistently disagreed with the Moench decision discerning that it was an invalid development of a body of common law inconsistent with ERISA.


In the Fifth Third Bancorp v. Dudenhoeffer matter, Bancorp’s defined contribution plan included, among its investment selections, an ESOP option that invested funds primarily in employer stock.  During a two year period, the employer’s stock price declined 74% resulting in a loss of millions of dollars.  And yet, the plan continued to offer the ESOP option during this period.


A class action lawsuit initiated by the plan participants then ensued claiming that the plan and the employer breached their ERISA fiduciary duties by continuing to offer the ESOP as an investment option, as well as breached their fiduciary duty by failing to provide accurate information to plan participants of the risks of investing in the employer’s stock. The District Court dismissed the complaint for failure to state a claim, but the Sixth Circuit reversed.


In its opinion, the Supreme Court makes several important points:

  1. The fiduciary is not, in any way, required to break the law.  In other words, if acting on insider information would violate the federal securities laws, the requirement to uphold the securities law trumps the ERISA obligation.
  2. If the securities laws would not be violated, the fiduciary must discern whether it has an obligation to, for example, discontinue an investment in employer securities, and whether it has an obligation to disclose to plan participants, information that might be relevant to their investment choices.
  3. The Supreme Court directs lower courts to consider what a prudent fiduciary (as defined above) would do in like circumstances.

In summary, the issuance of this Bancorp v. Dudenhoeffer opinion will certainly raise many questions that will surely be interpreted by the courts in years to come, particularly as it relates to the fiduciary standard that must be satisfied, with emphasis as it relates to investments in employer securities.  A couple points to bear in mind are:

  1. Full and accurate disclosure to plan participants is generally a good standard to follow.
  2. Who should be the plan fiduciary for purposes of employer securities?  Is it appropriate for an insider to engage in this role, or would prudence suggest that an independent fiduciary is more appropriate?  There is not a clear answer to this question and it may, in large part, depend on the facts and circumstances of the situation.

The guiding principles for all plan administration should be to administer the plan for the exclusive benefit of plan participants and consistent with the standard of prudence mandated by ERISA which may be governed by the facts and circumstances of the particular situation.


Another matter that bears watching is Tatum v. RJR Pension Investment Committee [No. 13-1360 (4th Cir. Aug. 4, 2014)].  In this case, the decision rendered by the U. S. Court of Appeals for the 4th Circuit would impose a fiduciary standard that would require meeting the level of what a fiduciary should have done, not just what a fiduciary could have done.  A ‘should have’ standard is higher than a ‘could have’ standard in that it requires an analysis of best course of action, not just permitted course of action.  It will be important for plan fiduciaries to watch the evolution of this case.

The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.


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