“Risk comes from not knowing what you are doing.”—Warren Buffett
Being an ERISA fiduciary may entail personal liability. In addition to making the plan whole for any losses resulting from a breach of fiduciary duty, a fiduciary may be required to disgorge any profits obtained in committing the breach, and be subject to “such other equitable or remedial relief” as a court may decide. Furthermore, the Department of Labor can impose on a fiduciary a penalty of 20% of any civil recovery.
Fiduciary duties under ERISA cannot be limited contractually, by participant waiver or otherwise (i.e., fiduciary exculpatory provisions are legally null and void). That is why many fiduciary committee members focus on the following important points:
• Prudence Means Knowing What to Know
“Common sense is not so common.”—Voltaire
In general, ERISA focuses more on a prudent process, rather than a prudent result. Being fully aware of your responsibilities (certainly in greater detail than set forth in this short summary) will help you best discharge your responsibilities prudently. This includes understanding the plan documents and their general operations. Established practice at many companies is to provide fiduciary “training” for new members, as well as refreshers at least annually. You should consider taking advantage of these and other available resources, as they will help familiarize you with the standards and obligations applicable to you. In addition, many fiduciaries also find a periodic compliance “audit” of plan documents, administrative processes and other matters helpful. Of course, you must act prudently in all of your plan-related activities.
• Prudence Means Knowing What You Don’t Know
“The only real knowledge comes when you recognize what you don’t know.”—Socrates (adapted)
As discussed below, sometimes the prudent thing is to conclude that you aren’t an expert on a given subject or responsibility. In other words, the prudent thing may be to seek help. As the Department of Labor notes “[t] he duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions especially given the standards to which fiduciaries are held under ERISA.”
• Prudence Means Knowing When to Delegate
“Who is wise? He who learns from all people.” Babylonian Talmud, Avot.
ERISA provides that to the extent a named fiduciary delegates investment management authority to any third-party service provider, “then such named fiduciary shall not be liable for an act or omission of such [hired third party] in carrying out such responsibility,” except to the extent that the delegation itself is imprudent. This applies to a variety of service providers, such as investment managers, custodians, recordkeepers, third-party administrators and others. Some functions may most properly remain “in house.” For other functions, the committee will most certainly wish to delegate.
For example, if a named fiduciary or fiduciary investment committee prudently hires an investment manager to manage all or a part of the assets of a plan in a separate account, the named fiduciary or investment committee would generally not be liable for the portfolio-level transactions effected by the investment manager in the account; although it would still need to be prudent in monitoring the manager’s performance. By contrast, were no such delegation in place, or if the delegation were made to one or more persons that do not meet the ERISA definition of an investment manager, the named fiduciary or investment committee could be personally liable for each and every plan investment under its care, as well as for the imprudent decision not to retain a statutory investment manager or leverage other service providers.
• Fiduciary Insurance
Many fiduciaries are covered by their employer’s insurance policy against certain claims of fiduciary breaches. It may be appropriate for you to check your company’s coverage as to whether it covers your activities as a member of the plan’s investment committee and the amount of coverage it affords. (Separately, you may also wish to confirm that your employer will make sure that you will be appropriately “bonded” under ERISA—a separate requirement.)
This article is an excerpt from Neuberger Berman’s White Paper: Top Ten Questions that New 401(k) Committee Members Shouldn’t be Afraid to Ask.