United States: Fiduciary Or Not Fiduciary? That Is A Difficult Question

If you are an employer, plan administrator, or financial advisor, how can you tell whether you are a fiduciary as defined by ERISA? There is a myriad of case law addressing this exact issue, but still, bright line rules are difficult to identify.

Express or Implied Status

Fiduciary status can be created in two ways. First, fiduciary status is created if a person or persons are expressly named as fiduciaries in the plan documents. 29 U.S.C. § 1102 (a). If not named specifically in the plan, fiduciary status can be created through action to the extent a party: (1) exercises any discretionary authority or control regarding management of a plan or exercises any authority or control respecting management or disposition of its assets; or (2) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so; or (3) has any discretionary authority or discretionary responsibility in the administration of such plan. 29 U.S.C. § 1002(21)(A). Thus, the concept of fiduciary under ERISA is broader than common law concept of trustee and it includes not only those named as fiduciaries in the plan or those who, pursuant to procedure specified in the plan, are identified as fiduciaries, but any individual who de facto performs specified discretionary functions with respect to management, assets, or administration of plan. Custer v. Sweeney, 89 F.3d 1156, 1161 (4th Cir. 1996).

Not every action taken by an employer rises to the level of fiduciary status. Bendaoud v. Hodgson, 578 F. Supp. 2d 257, 276 (D. Mass. 2008). Thus, the threshold inquiry is "whether that person was acting as a fiduciary (that is, performing a fiduciary function) when taking the action subject to complaint." Pegram v. Herdrich, 530 U.S. 211, 226, 120 S. Ct. 2143, 147 L. Ed. 2d 164 (2000).

For instance, courts have found that day-to-day business decisions by an employer that may affect a retirement or pension plan do not necessarily give rise to fiduciary status. See, e.g., Berger v. Edgewater Steel Company, 911 F.2d 911, 915 (3rd Cir. 1990) (holding that an employer's decision to refuse to grant retirement benefits during a difficult financial time was a business decision that did not implicate fiduciary duties); Flanigan v. General Electric Co., 242 F.3d 78, 88 (2nd Cir. 2001) (a selling company's decision to transfer pension funds in a spinoff did not implicate fiduciary duties under ERISA); Dzinglski v. Weirton Steel Corp., 875 F.2d 1075, 1079 (4th Cir. 1989) ("[b]usiness decisions can still be made for business reasons, notwithstanding their collateral effect on prospective, contingent employee benefits."); Ames v. American Nat'l Can Co., 170 F.3d 751, 757 (7th Cir. 1999) (when company representatives are negotiating the sale of a division, they are not acting in their capacity as a plan fiduciary, and thus they do not bear the legal obligations that go along with fiduciary status.).

Moreover, employers are generally afforded wide latitude to design the plan, including the mechanism for distributing benefits, as they see fit without ERISA fiduciary implications. See, e.g., Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 444, 1119 S. Ct. 755, 142 L. Ed. 2d 881 (1999) (plan sponsor not an ERISA fiduciary in making decisions regarding design of the plan); Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78, 131 L. Ed. 2d 94, 115 S. Ct. 1223 (1995) (holding that "employers or other plan sponsors are generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans.").

Additionally, mere influence as an employer over decision-making fiduciaries is not enough to establish fiduciary status. See In re La.-Pac. Corp. ERISA Litig., No. 02-1023-KI, 2003 U.S. Dist. LEXIS 7645, at *16 (D. Or. Apr. 24, 2003) (exercising influence on officers who are themselves fiduciaries is insufficient to trigger fiduciary status, as "courts have held that fiduciary status is based on actual decision-making power" rather than on influence over decisions made by a plan trustee (citations omitted)). See also Crowley v. Corning, Inc., 234 F. Supp. 2d 222, 228- 29 (W.D.N.Y. 2002) (dismissing claim against company based on respondeat superior liability where a plan committee comprised of company officers was responsible for managing plan assets); Gelardi v. Pertec Computer Corp., 761 F.2d 1323, 1325 (9th Cir. 1985) overruled on other grounds, Cyr v. Reliance Std. Life Ins. Co., 642 F.3d 1202, 1207 (9th Cir. 2011) ("ERISA anticipates that employees will serve on fiduciary committees but the statute imposes liability on the employer only when and to the extent that the employer himself exercises the fiduciary responsibility allegedly breached.").

ESOP Rules

A different standard applies for determining fiduciary status pertaining to an Employee Stock Ownership Plan, or ESOP. As the court stated in Eckelkamp v. Beste, 201 F. Supp. 2d 1012, 1021-22 (E.D. Mo. 2002), this is because all-important business decisions necessarily have an effect on the company's stock:

For example, while setting compensation levels is generally considered to be a ministerial business function and does not implicate ERISA fiduciary duties, in the context of an ESOP, courts have not been consistent. Some courts have held that setting compensation levels of employees and officers do not specifically involve the management or disposition of the ERISA plans assets and therefore do not give rise to fiduciary status. See, e.g., Bendaoud, 578 F. Supp. 2d at 276 (finding that "[s]etting and receiving executive compensation falls outside the purview of ERISA because it does not directly involve the 'management or disposition of [the plan's] assets.'"); Eckelkamp, 201 F. Supp. 2d at 1022 (holding that "[a]n employer's discretion in determining salaries is a business judgment which does not involve the administration of an ERISA plan or the investment of an ERISA plan's assets. Such a decision may ultimately affect a plan indirectly but it does not implicate fiduciary concerns regarding plan administration or assets."). But, at least one other court has held that setting compensation levels does give rise to fiduciary status under ERISA. See, e.g., Johnson v. Couturier, 572 F.3d 1067, 1077 (9th Cir. 2009) (holding that "where ... an ESOP fiduciary also serves as a corporate director or officer, imposing ERISA duties on business decisions from which that individual could directly profit does not ... seem an unworkable rule.").

Delegating Fiduciary Status

In order to alleviate the possibility of establishing fiduciary status on its actions, some employers opt to delegate fiduciary responsibilities to a third-party. ERISA permits an employer to do this, but if the plan documents do not provide "a procedure for the designation of persons who are not named fiduciaries to carry out fiduciary responsibilities," any such designation will not alleviate a named fiduciary from its duties. 29 C.F.R. § 2509.75-8 FR-14. The selection of a third-party administrator does create a fiduciary status, and the employer must act "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims" in choosing an appropriate provider. 29 U.S.C. § 1104(a)(1)(B).

Similarly, not all actions by third-party administrators of a pension or retirement plan give rise to fiduciary status. Again, the focus must be on the act performed by the third-party plan administrator and only actions that relate to transactions dealing with a pool of assets, such as "selecting investments [or] exchanging one instrument or asset for another," Johnson v. Georgia-Pacific Corp., 19 F.3d 1184, 1189 (7th Cir. 1994), are the type of actions that give rise to fiduciary status. Purely ministerial functions do not create fiduciary status. Pacificare v. Martin, 34 F.3d 834, 837 (9th Cir. 1994). Indeed, the Department of Labor guidelines clearly state that persons "processing claims, applying plan eligibility rules, communicating with employees and calculating benefits" are not fiduciaries under ERISA. Baxter v. C.A. Muer Corp., 941 F.2d 451, 455 (6th Cir. 1991) (citing 29 C.F.R. § 2509.75-8 D-2).

Additionally, third-party administrators who are merely the depositories for the funds, act only at the direction of another, and have no authority to manage or dispose of assets without such direction, do not have "practical control or authority" over the assets to implicate fiduciary status. David P. Coldesina, DDS PC, Employee Profit Sharing Plan and Trust, 407 F.3d 1126, 1133-34 (10th Cir. 2005); CSA 401(k) Plan v. Pension Professionals, Inc., 195 F.3d 1135 (9th Cir. 1999) (holding that the third-party administrator did not step outside the scope of rendering administrative services and create a fiduciary relationship when it discovered apparent embezzlement while preparing financial statements, notified the plan's trustees and entered into a repayment agreement with the embezzler).

Financial Advisors

With regard to financial advisors, the statute states that fiduciary status will be created if investment advice for a fee is rendered. 29 U.S.C. § 1002(21)(A)(3). The federal regulation provides some guidance as to what constitutes the rendering of investment advice:

C.F.R. § 2510.3-31(c). Federal courts will apply this regulation in determining fiduciary status, and each element set forth in the regulation must be satisfied before the court finds fiduciary status to exist. Farm King Supply, Inc. v. Edward D. Jones & Co., 884 F.2d 288, 293 (7th Cir. 1989); Thomas, Head & Greisen Employees Trust v. Buster, 24 F.3d 1114, 1118-1120 (9th Cir. 1994).

Certainly, if you are an investment advisor retained on behalf of a retirement or pension plan, the first requirement is not difficult to meet. With regard to the second requirement, the rendering of one isolated piece of advice does not rise to the level of a fiduciary. Damasco & Assocs. 401(K) Profit Sharing Plan v. Mfrs. Life Ins. Co., No. C 99-2135 CRB, 1999 U.S. Dist. LEXIS 13654, *15, (Aug. 20, 1999) (finding one alleged instance of investment advice is insufficient to confer fiduciary status); see also Am. Fed. of Unions Local 105 Health Assurance & Welfare Fund v. Equitable Life Assurance Soc'y of the U.S., 841 F.2d 658, 664 (5th Cir. 1988) (holding the "regular basis" requirement is not met by urging purchase of insurance products and not providing additional investment advice after purchase).

With regard to the third requirement, courts have held that the agreement need not be in writing nor must it specify that the party was to act as a fiduciary. Olson v. E.F. Hutton & Co., Inc., 957 F.2d 622, 627 (8th Cir. 1992); Thomas, Head & Griesen, 24 F.3d at 1119. With regard to the fourth requirement, courts have found that the advice rendered does not have to be "the" primary basis for the plan's investment decisions, but rather only "a" primary basis. See, e.g., Ellis v. Rycenga Homes, Inc., 484 F. Supp. 2d 694, 710 (W.D. Mich. 2007); Thomas, Head & Griesen, 24 F.3d at 1119.

In determining whether the fifth requirement is met, courts have consistently held that any compensation, including commissions, satisfies the requirement. Thomas, Head & Griesen, 24 F.3d at 1120; Reich v. McManus, 883 F. Supp. 1144, 1153 (N.D. Ill. 1995).

The final requirement is that the advice must be individualized and based on the particular need of the plan. The Ellis court has explained this does not include the general promotion of a product or service, which might be recommended to all of the financial advisor's customers:

Obviously, the writers of the regulation were attempting to differentiate individualized investment advice, which is based upon the particular needs of the plan, from the general promotion of a product or service, pursuant to which a stockbroker might "recommend" a security to its customers at large. To be sure, the line between sales activity on the one hand and advice on the other may be indistinct in some circumstances. In the present case, however, the record clearly establishes that Baetens was advising the plan and not merely subjecting it to generalized sales efforts.

484 F. Supp. 2d at 709 n.2. Moreover, if an advisor merely gave its typical sales pitch regarding investment options that were available for the plan, but never explicitly or impliedly represented that they were suitable for the particular plan, that does not constitute individualized investment advice. Farm King Supply, Inc., 884 F.2d at 293-294. Finally, computer-generated investment recommendations will not be considered individualized investment advice as long as the financial advisor is merely performing a ministerial or clerical function and not inserting his or her own thought process into the results provided. See DOL Advisory Opinion 2001-09.

Conclusion

In summary, when not a named fiduciary, it is often difficult to determine whether fiduciary status under ERISA has been conferred based on the action undertaken. When faced with a decision that relates to an ERISA-governed retirement or pension plan, it is advisable to make sure that you are acting under the prudent man standard and to document each step you take in making your decision in order to be able to defend your actions if it is determined that fiduciary status was created.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.