A Fiduciary s s Duty to Monitor Service Providers and Procedural Obligations

Transcription

1 A Fiduciary s s Duty to Monitor Service Providers and Procedural Obligations THE 31 st ANNUAL ESOP ASSOCIATION CONFERENCE May 13-14, 2008 Washington, D.C. Stephen D. Smith, Partner Krieg DeVault LLP ssmith@kdlegal.com Vaughn Gordy, Senior Vice President GreatBanc Trust Company vgordy@greatbanctrust.com

2 Target Audience We have chosen to target this presentation to: Members of the Board of Directors of an ESOP sponsor, and Members of the ESOP Committee appointed by the Board of Directors of an ESOP sponsor Each fiduciary has responsibility for selecting and monitoring fiduciary and non- fiduciary service providers 2

3 Who Are the Fiduciaries of an ESOP? Board of Directors For Some Decisions Appointing and monitoring ESOP Committee Selecting and engaging ESOP Trustee Not Others Amendments to ESOP Decision to terminate ESOP ESOP Committee or Plan Administrator For Some Decisions Directing Trustee Plan Administration (Non-Ministerial) Not Others Participant Communications 3

4 Who Are the Fiduciaries of an ESOP? Trustee Directed Discretionary Can be either with regard to share price and shareholder voting Always directed with regard to individual participant distributions 4

5 Categories of Fiduciaries Appointing Responsible for appointing and monitoring activities of its appointees (e.g., Board of Directors of ESOP sponsor) Named Can be appointee of appointing fiduciary or named in ESOP documents (e.g., committee members appointed by Board of Directors or trustee named in Trust Agreement) Unnamed Based on responsibilities or role (sometimes referred to as functional fiduciaries) Exercise of discretionary authority or control over management of o ESOP or its assets Provide investment advice for a fee Exercise of discretionary authority or control over administration of ESOP (e.g., financial advisor on investment of ESOP cash) 5

6 Who Is...? Typical named fiduciaries (who can also be characterized as service providers Trustee (both inside and outside ) ESOP committee members or plan administrator Special fiduciary Investment manager Investment advisor Source of Named Fiduciaries Normally based on plan documents [1] Fiduciary must be named in plan or pursuant to procedure in plan, identified as a fiduciary by the employer Designation of employer will not prevent persons who act for employer being treated as fiduciaries [1] ERISA Section 402 requires the plan to provide for one or more named fiduciaries to manage the plan. 6

7 And Who Isn t t...? Typical service providers who are not (or should not be) fiduciaries Recordkeeping/plan administration Legal counsel [2] Consultants Valuation/financial advisor [2] But see Johnson v. Couturier (E.D. CA 2007). 7

8 Allocation of Responsibility Among Named Fiduciaries Permitted by ERISA [3] Directed vs. discretionary Independent vs. inside trustee Allocation normally specified in plan documents E.g.: Determination of stock value E.g.: Determination of prudence of investment in employer stock E.g.: Investment of cash [3] ERISA Section 402(a)(1). 8

9 Directed vs. Discretionary Trustees ERISA Section 403(a) provides the trustee.... shall have exclusive authority and discretion to manage and control.... the ESOP However, Section 403(a) also allows a trustee to be subject to the direction of a named fiduciary (e.g., the ESOP committee ) [4] [4] See also Department of Labor Field Assistance Bulletin , December 17,

10 Directed vs. Discretionary Trustees Directed trustee s s responsibilities are narrower than discretionary trustees; how much narrower depends on plan documents To be treated as directed, directed, a trustee must determine: Direction is proper under ERISA Direction is proper under ESOP documents However, directed trustee not required to independently decide every transaction is prudent or second-guess the discretionary fiduciary Directed trustee is a backstop ;; it makes sure a direction is appropriate 10

11 Standard of Care Applicable to Fiduciaries Prudent expert ERISA s s fiduciary obligations are among the highest known to the law All actions must comply with plan documents Plan Trust agreement Summary plan description Charters and/or investment policy statements Procedures (e.g., diversification and distributions) 11

12 Appointing Fiduciary Duties Useful in Applying Standards to Service Providers Duty to Prudently Appoint Appointees must have expertise or access to same necessary to carry out duties as named fiduciaries Minimum requirement named fiduciaries must be able to interpret and properly apply advice of experts [5] [5] Martin v. Harline, 15 EB Cases (D. Utah 1992); Whitfield v. Cohen, 682 F. Supp. 188 (S.D. NY 1988). 12

13 13 Qualifications to Consider in Selecting Named Fiduciaries [6] Experience in the area for which the named fiduciary is selected (e.g., ESOP trustee experience) Education and experience, including ability to ask appropriate questions and act prudently on advice Client and/or professional references Past performance Key for lay named fiduciaries appointing fiduciaries should provide knowledgeable advisor [6] Serota, ERISA Fiduciary Law, Ch. 4.III.B. (2d Ed. 2006) at 192.

14 Duty to Prudently Monitor Performance Failure to monitor violates prudence requirement [7] Must confirm appointed fiduciary is fulfilling responsibilities Burden is on appointing fiduciary to seek this information [7] Sandoval v. Simmons, 622 F. Supp (C.D. Ill. 1985). 14

15 Duty to Prudently Monitor Performance Methods of monitoring Frequent contact through oversight Formal review Periodic presentations/reports by appointees Process: Appointing fiduciary should maintain record of monitoring activities/results as to the following: Compliance with ESOP documents Compliance with general needs of ESOP Compliance with ERISA and Internal Revenue Code, as they apply to ESOP Not causing loss to ESOP 15

16 Duty to Take Remedial Action Applies where appointee is not fulfilling duty Protect ESOP from loss Remedial actions Removal [8] Provide education Engage expert advisor [8] See, e.g., Whitfield v. Tomasso, 628 F. Supp (E.D.N.Y. 1988). 16

17 Extra Monitoring Duties for Appointed Fiduciaries Corporate actions which could affect ESOP s investment (e.g., acquisition or sale of subsidiary) Trustee vs. committee or plan administrator responsibility who determines continued investment in company stock? Consider use of charter or investment policy Little guidance and conflicting case law [9] Transactions that can materially affect stock value [9] See, e.g., Armstrong v. LaSalle Bank, National Association, 2006 U.S. App. LEXIS (7 th Cir. 2006). 17

18 Selection of Service Providers and Standards to be Applied Selection of service providers may constitute exercise of fiduciary discretion Appointing and named fiduciaries should consider applying same standards to service providers Department of Labor s s position on selection of service providers: [10].... [F]iduciary must engage in an objective process designed to elicit information necessary to assess the qualification of the provider, the quality of the services offered, and the reasonableness of the fees charged in light of the services provided. [10] Department of Labor Advisory Opinion A, August 20,

19 Selection of Service Providers and Standards to be Applied The.... process should be designed to avoid self- dealing, conflicts of interest or other improper influence. An RFP process is likely to satisfy these requirements. DOL position on indemnification and limits on liability Example: service provider liable only for gross negligence and any recovery limited to fees paid Fiduciary should assess the ability to obtain comparable services at comparable costs without such limits. Fiduciary must assess risk of loss to plan, including potential for and outside limits of loss 19

20 Selection of Service Providers and Standards to be Applied Recommended protocols RFPs Due diligence questions Periodic forays into market for costs, deployment of new technology, level of service Documentation of process 20 KD