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Wayne H. Miller
Chief Executive Officer
Denali Fiduciary Management

What’s an ERISA Fiduciary to Do?
Many board members mistakenly believe that their fiduciary duties come to an end once the plan administration committee is appointed.

Editor's note: Wayne Miller, author of the following column, will lead the Directors & Boards webcast, “ERISA and Directors: What You Don’t Know Will Hurt You,” scheduled for May 16, 2006, at 1 p.m. EST. The webcast/teleconference is free of charge. For more information and to register, click here.

The Employee Retirement Income Security Act of 1974 (ERISA) -- the federal law that governs retirement plan management -- does not articulate specific fiduciary governance processes. The absence of a statutory example of retirement plan governance has resulted in dysfunction in the private retirement plan system in this country.

Over many years, the lack of a fiduciary governance safe harbor allowed service vendors to heavily influence the development of plan sponsor fiduciary behavior. As might be expected, the influence of non-fiduciary service vendors on the evolution of the retirement industry has been counterproductive to the fiduciary intent of serving as a guardian for long-term trust assets.

As a practical matter, dysfunctional fiduciary behavior was irrelevant during much of the 1980s and 1990s. The extended bull market effectively shielded fiduciaries from realizing liability.

The Perfect Storm
Events of the past several years, however, have created the perfect storm for retirement plan fiduciaries, including plan administrative committee (PAC) members as well as those members of the board of directors who appoint them. Those board members (often part of the compensation committee) are referred to as “appointing fiduciaries.”

Thirty years of case law have made certain duties and responsibilities of an appointing fiduciary very clear. To the extent they fail to perform their oversight duties, they may incur personal financial liability for plan losses attributable to a breach of fiduciary duty by the committee members they appointed. Given their net worth, the prospect of attaching personal liability to those board members makes them tempting targets for plaintiff’s counsel.

Two Vital Components to Avoiding Risk
For appointing fiduciaries, there are two components to mitigating ERISA fiduciary risk.

First, appointing fiduciaries should promote a fiduciary culture and governance system that shines a bright light on the business relationship of every service vendor to the retirement plan. Naturally, all service vendors have self-interest embedded in their products or services. In a fiduciary context, the purpose of shining a bright light is to put that self-interest “on the table.” Only then can plan fiduciaries determine whether that self-interest is reasonable, is tolerable, or does harm to plan participants. If PAC members do not know what a vendor’s self-interest is, they cannot be in a position to assess the appropriateness of the vendor’s business relationship to the retirement trust. Without that analysis, neither they nor the appointing fiduciaries are in a position to honor the duty of loyalty required of an ERISA fiduciary.

Second, appointing fiduciaries should encourage a documentation system that will serve as evidence to anyone looking over the PAC’s shoulders that the plan sponsor’s fiduciary duties have been properly executed to a “prudent man” (the language ERISA uses) standard of care. This standard of care is often misunderstood. It is commonly mistaken for some kind of assessment of character -- as though the prudence of the PAC members’ personalities would, by itself, be sufficient to meet the standard. We call this circumstance the “…but we’re good people here…” mistake.

The “prudent man” standard of care requires that PAC members are knowledgeable about the duties required of them and how to carry out those duties. They are supposed to either be prudent experts in all elements of plan management or hire them. Hiring a prudent expert whose self-interest conflicts with the best interests of the plan participants is inconsistent with the required standard of care.

No Safe Harbor
Unfortunately, neither ERISA nor the Department of Labor articulates a safe harbor against fiduciary liability. They both address fiduciary conduct by articulating principles rather than processes.

Our advice to appointing fiduciaries on how to avoid liability, in an environment with no safe harbor, is to focus on being very practical. The higher the standard of conduct exemplified by the plan sponsor, the greater the likelihood that the risk of liability exposure has been contained. Because plaintiff’s counsel likes to pursue low-hanging fruit, the higher up on the tree your governance system puts you, the better your protection against the threat of litigation.

Wayne H. Miller is chief executive officer of Denali Fiduciary Management, http://www.denalifm.com. The firm is dedicated exclusively to providing solutions to the challenges fiduciaries face in the management and governance of ERISA retirement plans. He co-authored the Fiduciary Assistance and Compliance Systems (FACS©) Program, an ERISA governance guidebook, and the online ERISA fiduciary governance training available through Financial Executives International (FEI). He can be contacted at wmiller@denalifm.com.

A longer version of this article, which included an eight-point guideline on mitigating fiduciary risk, appeared in the Fourth Quarter 2005 edition of Directors & Boards.