Fiduciary Responsibilities and Participant Rights - Module 4 of 5

Module Four: Fiduciary Responsibilities and Participant Rights

             ERISA sets the minimum standards for most private-employer retirement and welfare benefit plans and provides protections for participants and beneficiaries. Therefore, it is essential to understand who is held accountable for maintaining ERISA’s standards, what the consequences are for violating the Act and what rights and remedies are available to participants and beneficiaries who assert ERISA claims.

Fiduciaries

ERISA requires individuals who manage plan assets—called fiduciaries—to meet certain standards of conduct.[1] A fiduciary relationship exists when one person has an obligation to act for the benefit of someone else.[2] It is a position of trust. Whether the plan is related to retirement benefits or health and welfare benefits, fiduciaries must run the plan in the best interests of participants and beneficiaries and for the exclusive purpose of providing benefits and paying reasonable plan expenses.[3] In other words, fiduciaries can’t act to serve their own interests or those of the employer.[4]

To protect plan assets, ERISA states that anyone with discretionary control or authority over plan management, assets or administration or who provides investment advice for a fee has certain fiduciary responsibilities.[5] Trustees, administrators and members of a plan's investment committee are examples of those with fiduciary duties.[6] However, status as a fiduciary is not based solely on a job title; it is primarily based on the functions that are performed for the plan. [7] Human resources professionals, benefits administrators and other company representatives could be plan fiduciaries if they exercise discretionary authority or control in the administration of an ERISA-governed employee benefit plan.[8]

All written plan documents under ERISA must “provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.”[9] The named fiduciary can be a specific person or identified by a job title or may be an administrative committee or board of directors.[10] The named fiduciary may hire professionals to give advice with regard to fiduciary responsibilities under the plan and may appoint investment managers to oversee plan assets.[11] Participants should be able to contact the named fiduciary to find out who is responsible for various aspects of the plan.

Some professionals that work with plans are not fiduciaries. Generally, attorneys, accountants and actuaries are not fiduciaries if they are acting solely in their professional capacities.[12] The question to ask is whether the person exercises discretionary authority or control over the plan.[13] If so, that person is probably a fiduciary.

Fiduciary Duties

              Loyalty

First and foremost, fiduciaries have the duty of loyalty to run the plan solely in the interest of participants and their beneficiaries and for the exclusive purpose of providing benefits to them.[14] This includes the duty to avoid conflicts of interest.[15] This means that fiduciaries are prohibited from making plan transactions that benefit themselves or other fiduciaries.[16]

Prudent Care  

The dictionary definition of prudence is to use skill and good judgment in the use of resources.[17] Under this duty, a fiduciary either needs to have expertise in certain areas that affect plan management—such as investment knowledge for a retirement plan—or hire someone who has the knowledge and skills to carry out those functions.[18] Under the duty of prudence, a fiduciary must make careful decisions for the plan, so it is a good idea for fiduciaries to document key decisions related to the plan and their reasons.[19] For example, when selecting a service provider, the fiduciary should vet several potential providers, research them, interview them using similar sets of questions and make a meaningful comparison based on the same criteria for each provider and document the selection process.[20]

Following Plan Documents

The written plan document lays the foundation for the plan and includes details about plan operations and procedures and the benefits provided. Employers must be familiar with the information contained in the plan document, regardless of whether it was created internally or by a third-party service provider. Furthermore, the plan must be periodically reviewed and updated if any changes have been made.[21] Features of every ERISA-covered employee benefit plan must include:

·         A procedure for establishing and carrying out a funding policy for the plan;

·         Procedures for allocating the plan’s operational and administrative responsibilities;

·         Procedures for amending the plan and for identifying the parties who have authority to amend the plan; and

·         Details about how payments are made to and from the plan.[22]

             Plan sponsors must ensure that the relevant documents and procedures are compliant and kept up to date when rules or plan details change.[23]

              Diversifying Investments  

For retirement plans, diversifying investments can help minimize the risk of large losses.[24] Therefore, ERISA requires diversification “unless under the circumstances it is clearly prudent not to do so.”[25] Fiduciaries should evaluate their individual investments as they relate to the entire portfolio and should document their investment decisions and their thought processes.[26]

              Continuity

A fiduciary may not simply decide to quit even if the plan has other fiduciaries.[27] A fiduciary that wants to step down needs to follow plan procedures and ensure that another fiduciary is taking over all relevant responsibilities.[28] This ensures that plan operations continue without interruption and that participants know who is in control of the various aspects of plan operations.[29]

               Conservation of Funds

Fiduciaries also must ensure that they pay only reasonable expenses for plan operations.[30] They should be aware of who the other fiduciaries are and their functions to avoid duplicating work and expenses.

Remedies for Fiduciary Breach

Fiduciaries can be held personally liable for plan losses caused by their breaches of duty and must return any profits that were made through misusing plan assets.[31] Furthermore, the Department of Labor may assess a civil penalty equal to 20% of the amount recovered for the plan through litigation or a settlement.[32] These civil penalties may be assessed for:

·         Failing to prudently operate the plan for the exclusive benefit of participants.

·         Using plan assets for a fiduciary’s own benefit or the benefit of other people who are responsible for plan operations or are otherwise interested parties.

·         Failing to properly value plan assets at their current fair market value or failing to hold plan assets in a trust.

·         Failing to follow the terms of the plan—unless those terms are inconsistent with ERISA.

·         Failing to properly select and monitor service providers.

·         Firing or taking any other adverse action against participants for exercising their rights under the plan.[33]

            Fiduciaries can also be held liable for a co-fiduciary’s violations if they:

·         Knowingly conceal or participate in another fiduciary’s act or omission while understanding that it is a breach of duty.

·         Fail to comply with the fiduciary duties that are attached to their specific responsibilities under the plan and that failure enables another fiduciary to commit a breach.

·         Have knowledge of a breach by another fiduciary and fail to make reasonable efforts to remedy the breach.[34]

         Furthermore, fiduciaries who commit serious ERISA violations can face criminal penalties, depending on the egregiousness and magnitude of the violation, the likelihood that prison time would serve as both a deterrent and a punishment and on the history of this person’s ERISA violations.[35] Examples of criminal behavior related to employee benefit plans include embezzlement, accepting kickbacks and making false statements in violation of the U.S. Criminal Code.

     Even for fiduciaries, there are a few plan-related decisions that employers or designated representatives make that can be categorized as business decisions rather than fiduciary actions.[36]  Business decisions include the choice to establish a plan, select the benefit package, include certain plan features and amend or terminate a plan.[37] These business decisions are not governed by ERISA because an employer is acting on behalf of its business, not the plan.[38] However, when the employer or a designated representative implements those decisions, that person is then acting on behalf of the plan and may be a fiduciary.[39] So the same person could sometimes act as a fiduciary and sometimes make business decisions that aren’t under ERISA’s purview.[40]

Correcting Errors

Sometimes employers can self-correct errors that they made regarding a plan. The DOL’s Voluntary Fiduciary Correction Program covers 19 transactions that are eligible for self-correction, including the failure to remit participant contributions in a timely manner and some errors involving prohibited transactions with interested parties.[41] The program is designed to help plan fiduciaries promptly restore plan assets and benefits for participants.[42]

Participant Rights

In addition to imposing duties on employers and plan fiduciaries, ERISA provides participants with certain rights and remedies.

Access to Plan Information

Because an important goal of ERISA is to provide transparency, supplying participants with information about plan features and funding is essential. Plan administrators must provide a summary plan description, which contains straightforward information about the benefits the plan provides and how the plan operates.[43] Additionally, each participant must be provided with a copy of the plan's summary annual report each year, which contains the financial information that most plans must file with the federal government on Form 5500.[44] These documents—in addition to a summary of material modifications if changes are made—must be provided to participants free of charge.[45] Participants have a right to review other plan documents and the full Form 5500, though a fee can sometimes be charged to cover the expense of making copies, depending on which documents are requested.[46]

Fair Process for Benefit Claims

Every benefit plan must have a reasonable process for participants to make claims for benefits, and participants must be given a reasonable opportunity to have a full and fair review of a benefits denial.[47] A description of the claims procedures, including the applicable timeframes for review and response, must be included in the summary plan description.[48] If a claim is denied, the participant or beneficiary must receive a written notice, in easily understood language, that identifies the specific reasons for the denial.[49] The notice must reference the plan provisions that led to the determination and include a description of any additional material that the participant may need to address the decision, as well as an explanation of why the material is necessary.[50] The notice also needs to include a statement about the participant’s right to sue if the claim is ultimately denied on review.[51]

For most claims, the plan administrator must issue an initial decision on claims within 90 days but may have an additional 90 days if special circumstances warrant an extension.[52] Timeframes differ for certain types of claims. For example, there are different procedures and timeframes if the claim is for disability benefits or falls under a group health plan.[53] In general, participants and beneficiaries must be given a reasonable opportunity to appeal an adverse benefit determination and have a full and fair review. For most claims, participants must be provided:

             ·         At least 60 days to appeal the denial after receiving the notification. 

·         An opportunity to submit written comments, documents, records and other information related to the claim.

·         Free copies and reasonable access to all documents, records and other information relevant to the claim.

·         A review that considers all information that the claimant submitted, regardless of whether the information was submitted before the initial benefit determination.[54] 

The claims procedures for group health plans are more detailed than those for other claims and must provide participants with at least 180 days to appeal.[55] If a plan doesn’t establish or follow reasonable claims procedures under ERISA, the participant may proceed with a civil lawsuit.[56]

Right to Sue

            ERISA gives participants and beneficiaries the right to bring civil actions to recover benefits that they are entitled to under the plan.[57] They may also sue to enforce their rights under the plan or to clarify their rights to future benefits.[58] When a participant sues, courts must look at the plan documents and the terms of the plans to determine participants’ rights.[59] Terms are interpreted by their ordinary meanings and any ambiguities that could have multiple meanings are interpreted in favor of the participant. Courts will also protect a participant’s reasonable expectations for coverage under a plan.

A plan fiduciary may also bring a lawsuit against other fiduciaries for ERISA violations.[60] Fiduciaries may be held personally liable to make up for plan losses and to return any profits they made as a result of a breach.[61] Furthermore, participants, beneficiaries and fiduciaries may ask the court for an injunction or other equitable remedy.[62] Equitable relief means that the court orders a party to either act or refrain from acting in a certain way. For example, a court may order a plan administrator to change plan terms to make them ERISA compliant or require a fiduciary to carry out a promise made to a participant.

             The law is always evolving when it comes to interpreting rights, responsibilities, remedies and exemptions under ERISA. The next module will discuss some of the latest topics in ERISA litigation.