The Extent of Obligation

Art by Tim Bower

One of the most important things an adviser and his plan sponsor client can do for the members of the sponsor’s retirement plan committee is to supply them with robust and periodic fiduciary training. This is an important measure in minimizing fiduciary risk. While fiduciary training is not required under the Employee Retirement Income Security Act (ERISA)—and some studies indicate that only a minority of sponsors provide training to their committee, it is a best practice and one we and many other law firms follow.

For example, in the event of a Department of Labor (DOL) audit, the investigating agent will frequently inquire about the plan’s fiduciary training program. While there is no checklist of items to be covered in such a program, there will generally be an overview of ERISA and discussion of fiduciary responsibilities and potential fiduciary liability. Committee members will be advised to become familiar with the plan and its investment policy statement (IPS), also, if there is a committee charter, the committee’s responsibilities under that document.

Such training sessions are generally provided to a committee as a group, rather than individually. When a new committee member is appointed, he should receive the same type of training. To the extent that the practices for fiduciaries have been memorialized at the plan, he should be given a hard or electronic copy. However, a recently decided case from the Northern District of Georgia, Fuller v. SunTrust Bank, raised the question of the extent of an incoming committee member’s obligations.

The starting point for an analysis of fiduciary obligation is ERISA Section 409(b), which provides that no fiduciary is liable for a breach of fiduciary duty committed by his predecessor either while that person was acting as the fiduciary or afterward. However, shortly after the enactment of ERISA, the DOL issued advisory opinions explaining the limits of that statutory language: If a fiduciary obtains knowledge of a breach committed by a prior fiduciary, that successor fiduciary has a duty to remedy it.

Case law has followed the DOL approach, and there is also authority that a fiduciary duty may exist to review existing investments, at least within a reasonable time, and to take reasonable steps to remedy any discovered breach. See the following cases: Morrissey v. Curran, Buccino v. Continental Assurance Co. and Pension Benefit Guaranty Corporation v. Greene. To this extent, the interpretations of ERISA Section 409(b) are consistent with the common law of trusts, which imposes a duty on a successor trustee to remedy a breach of a prior trustee and imposes a liability on the successor to the extent a loss results from its failure to take remedial steps.

The primary issue before the District Court for the Northern District of Georgia was whether an obligation to remedy a breach of a fiduciary duty by a prior trustee required the successor trustee to have actual knowledge of the breach, or whether constructive knowledge was sufficient. The District Court noted that only one unreported district court case had applied the constructive knowledge standard; therefore, it followed the majority position.

The plaintiff’s position was that Title I of ERISA is heavily based upon the common law of trusts and that the Restatement (Second) of Trusts takes a contrary position—i.e., “A trustee is liable to the beneficiary for breach of trust if he knows or should know of a situation constituting a breach of trust committed by his predecessor and he improperly permits it to continue.”

The District Court was not persuaded, noting that no courts had relied upon this section of the restatement in addressing the issue. The District Court indicated that the result might be different if the plaintiffs could establish willful blindness on the part of the defendants—i.e., if the latter were highly suspicious of certain prior fiduciary conduct but purposely sought to avoid looking into it.

The court further concluded that, even if constructive knowledge were the appropriate standard, the plaintiffs could not establish any liability. For example, the fact that the plan utilized proprietary funds, and that several sponsors had been sued for utilizing such funds in their plans, was insufficient to establish knowledge of a fiduciary breach. The incoming committee members had no affirmative duty under ERISA to scour prior committee members or interrogate other members. Further—if for no other reason than the possibility of review by the DOL or a plaintiff in litigation—the committee’s minutes have a positive spin to them.

As is frequently the case under Title I of ERISA, there are no bright lines to be drawn. A new committee member should try to become as knowledgeable about the plan and its current activities as possible, and if he becomes aware of something that seems problematic, the matter should be pursued. He has no obligation, however, to satisfy himself that the plan is free of breaches that must be addressed.

Marcia Wagner is an expert in a variety of employee benefits and executive compensation areas, including qualified and nonqualified retirement plans and welfare benefit arrangements. She is a summa cum laude graduate of Cornell University and Harvard Law School and has practiced law for 32 years. Wagner is a frequent lecturer and has authored numerous books and articles.