Enhanced Focus on Fiduciary Duties Under ERISAJune 2008 – Alerts Tax & Estates Department Alert
Recently, in LaRue v. DeWolff, Boberg & Associates, Inc., the U.S. Supreme Court held that a participant in a 401(k) plan can sue an employer under the federal pension law known as ERISA for failing to timely follow a participant’s investment instructions. This decision has sharpened the focus on an employer’s role as a fiduciary under ERISA regarding 401(k) plan investment decisions. As a fiduciary, the employer retains responsibility under ERISA - not only for following participants’ investment instructions, but also for selecting and monitoring the investment choices made available to plan participants. LaRue will make it easier for participants to bring viable lawsuits against employers for breach of fiduciary duty. In LaRue’s aftermath, employers will be challenged to make investment decisions that satisfy ERISA’s fiduciary standards and to minimize the risk of successful participant lawsuits.
Employers should follow a participant’s investment instructions. However, the employer also should review how it satisfies all of its fiduciary obligations under ERISA. Prudently selecting and monitoring investment funds and monitoring the fees charged by these funds are central components of this process. Best practices also dictate that an employer obtain professional assistance in managing the two-part process of selecting and monitoring investment funds and monitoring the fees charged by these funds.
First, the employer should develop a formal investment policy statement (IPS) providing investment guidelines to follow in making plan-level investment decisions. Unless the employer retains the internal capability to analyze the myriad factors that should inform any plan-level investment decision, it should hire both an expert investment advisor and knowledgeable ERISA counsel to work with the employer to develop and implement the IPS.
Second, it is equally important for an employer to act in accordance with the guidelines set forth in its IPS. If the IPS requires the employer to establish an “investment committee” comprised of high-level officers and human resources personnel to meet on a quarterly basis to discuss investment matters, the investment committee should be established and such meetings should be held. Committee members and advisors should evaluate fund performance, fee levels, management and any other relevant factors, and decide whether to retain or replace each investment option. ERISA counsel would advise the committee of its options from a fiduciary compliance point of view and, if necessary, renegotiate excessive fee arrangements.
Discharge of fiduciary duties is all about process. An employer that establishes and follows a formal process minimizes its risk of liability under ERISA. In the aftermath of LaRue, doing so is absolutely critical.