Fiduciary Responsibility of Trustees of Multiemployer Plans

Transcription

1 Fiduciary Responsibility of Trustees of Multiemployer Plans September 30, 1997 Albuquerque Convention Center Albuquerque, New Mexico 10:00 a.m. Prepared By: William K. Ecklund Felhaber, Larson, Fenlon & Vogt 4200 First Bank Building 601 Second Avenue South Minneapolis, MN Phone: (612) Facsimile: (612)

2 FIDUCIARY RESPONSIBILITY OF TRUSTEES OF MULTIEMPLOYER PLANS William K. Ecklund, Esquire I. Definition of Fiduciary A. Pre-ERISA The term is derived from the Roman law, and means a person who has a duty, created by his undertaking, to act primarily for another s benefit in matters connected with such undertaking. Before ERISA, the conduct of employee benefit plan fiduciaries was regulated by a combination of federal and state statutes and common law principles. There was not one source of regulation of plan fiduciaries, and in many cases fiduciaries could substantially limit their exposure to liability by contractual provisions. Prior to the passage of ERISA, the following federal statutes provided guidance of fiduciary responsibilities: The Internal Revenue Code established the exclusive benefit rule (IRC 401(a)) and provided that with respect to tax-qualified retirement plans, certain transactions were prohibited (IRC 503(b). The Taft-Hartley Act was the first federal labor law provision expressly regulating employee benefit plans. Congress made it a crime for an employer to pay anything of value to any employee representative. However, there was a specified exception under 302(c)(5) for payments to a trust fund established for the sole and exclusive benefit of the employees of such employer. Section 302(c)(5) has been applied so as to impose some fiduciary obligations on plan trustees. However, there is no federal agency that was given enforcement mechanisms, other than the normal enforcement of federal criminal laws. The Welfare and Pension Plans Disclosure Act was a disclosure statute that required administrators of employee benefit plans to file plan descriptions and annual reports with the Secretary of Labor and to provide information to participants. 2

3 B. Who is a Fiduciary Under ERISA? ERISA 3(21)(A) provides that a person is a fiduciary with respect to a plan to the extent that he or she: 1. exercises any discretionary authority or discretionary control with respect to management of the plan or exercises any authority or control with respect to the management or disposition of plan assets; 2. renders investment advice for a fee or other compensation, direct or indirect, with respect to any plan assets or has the authority or responsibility to do so; or 3. has any discretionary authority or discretionary responsibility in the administration of the plan. A list of possible candidates for fiduciary status consists of: Trustees Plan Administrators Trust Fund Employees Investment Manager The following can be fiduciaries, but generally are not: Investment Advisers Actuaries Attorneys Trust Fund Consultants ERISA does require that every employee benefit plan shall be established and maintained pursuant to a written instrument, which written instrument shall provide for one or more named fiduciaries who jointly or severally have authority to control and manage the operation and administration of the plan. (ERISA 402(a)(1)) A named fiduciary is one who is either named in the plan or who, pursuant to a procedure specified in the plan, is identified as a fiduciary. II. Fiduciary Duties A. Statutory Language: ERISA 404 sets forth the duties required of fiduciaries of employee benefit plans. Specifically,... a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and-- 3

4 (A) for the exclusive purpose of: (I) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan; (B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; (C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and (D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with [ERISA]. B. Personal Liability If a fiduciary does breach a fiduciary duty, the law provides that the individual breaching the duty shall be personally liable: 1. To make good any losses to the plan resulting from the breach 2. To restore to the plan any profits which have been made through the use of assets of the plan by the fiduciary 3. And may be removed as a trustee 4. Are subject to such other equitable relief as the court may determine. C. Prohibited Transactions In addition to breaches of fiduciary duties, fiduciaries are prohibited from engaging in certain transactions known as prohibited transactions. Engaging in these transactions would also be a breach of fiduciary duty as well as a prohibited transaction subjecting the fiduciary not only to the remedies described above, but also to excise taxes. Prohibited transactions can be basically broken down into two categories: 1. Transactions between the plan and a party in interest and 2. Transactions between the plan and a fiduciary The party in interest definition is quite elaborate, and includes: 4

5 Any fiduciary (including, but not limited to, administrator, officer, trustee, or custodian of a plan Legal counsel to the plan Employee of the plan A person providing services to the plan Any employer whose employees are covered by the plan An employee organization whose members are covered by the plan An owner, direct or indirect, of 50% or more of the voting power of stock which is an employee or employer organization whose employees or members participate in the plan Certain relatives Certain other trusts, officers, directors, etc. The transactions that are prohibited are certain sales, leases, loans, extensions of credit, the furnishing of goods and services, transfer to or use by the parties in interest of any asset of the plan, and any acquisition by the plan of any employer security or employer real property. not: With respect to the transactions between the plan and the fiduciary, the fiduciary shall deal with the assets of the plan for his own interest or for his own account in his individual or any other capacity act in any transaction involving the plan on behalf of a party whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan. III. Co-Fiduciary Liabilities Even though the fiduciary may not have personally engaged in any of these transactions, the fiduciary can be held liable for breaches of duties by a cofiduciary if: he participates knowingly in the act or omission of the co-fiduciary, knowing that that act or omission is a breach; 5

6 he or she enabled the co-fiduciary to commit the breach by his or her failure to fulfill his or her own fiduciary duty; or he knows about the breach and does not make reasonable efforts to remedy the breach. IV. Common Breaches of Fiduciary Duties Some of the more common types of breaches of fiduciary duties are: Failing to collect delinquent contributions Failing to monitor plan investments or making improper investments Inappropriate trustee expense reimbursements Failure to put certain administrative service arrangements in writing Transactions with parties in interest V. Fiduciary Liability Insurance - How to Insure Against Breaches of Fiduciary Duties Fiduciary liability insurance is a very specialized insurance product. No employee benefit plan should be without it and no one should agree to serve as a trustee unless fiduciary liability insurance has been procured. Fiduciary liability insurance is what its name states; it is insurance protecting a plan from losses caused by breaches of fiduciary duty. A. Insurance and ERISA ERISA addresses the issue of insurance in two sections. The first is a requirement that all employee benefit plans carry fidelity bonding insurance and the second is a section permitting, but not requiring, the purchase of fiduciary liability insurance. 6

7 1. Fidelity Bond ERISA 412 requires every fiduciary in an employee benefit plan and every person who handles funds or other property of the plan to be bonded. The amount of the bond needs to be set at the beginning of each fiscal year of the plan and shall not be less than 10% of the amount of the funds handled, with a minimum of $1,000 bond and a maximum of $500,000. Under certain circumstances, the law can require a higher maximum than $500,000 and under circumstances a plan may need to have more than $500,000 of insurance. 2. Fiduciary Liability Insurance ERISA 410(b)(1) allows a plan to purchase fiduciary liability insurance, provided that such insurance permits recourse by the insurer against the fiduciary in the case of a breach of fiduciary obligation by a fiduciary. The purchase of fiduciary liability insurance may itself lead to potential breach of fiduciary responsibility issues. In the case of Reich v. Continental Casualty Company, 18 EBC 1769, the Secretary of Labor had sued an insurance company for providing a fiduciary liability insurance policy extension at a premium of $970,000 for $1,000,000 of coverage. The suit was ultimately dismissed against the insurance company because it was deemed to be a non-fiduciary, and under these circumstances, restitution was not appropriate. However, the case points out that the Secretary of Labor also sued the trustees for breach of fiduciary duty with respect to the purchase of this insurance. That matter was settled out of court for an undisclosed sum. 3. Indemnification Indemnification - In addition to the purchase of fiduciary liability insurance, fiduciaries can be indemnified, but not by the plan. Indemnification is limited to the employer, employer association, or employee organization. Although not required by law, every fiduciary should insist on indemnification as a condition for serving as a trustee. Example of indemnification language (See Appendix A.) Indemnification is only as good as the financial security of the indemnifying organization. Indemnification resolution can be withdrawn. Some state statutes may prohibit or limit indemnification. Any such limitations, however, should be preempted by ERISA. 4. Recourse Insurance 7

8 This cannot be purchased by the Plan. It should be purchased either by the Trustee or by the organization that appoints the Trustee. This insurance eliminates the recourse provision of the main fiduciary liability policy. The cost for this is usually minimal (e.g. $25.00 per year per trustee). 8

9 WHEREAS, the ( Union ) appoints employees and agents of Union to serve as Trustees for (Name of jointly-administered trust fund) ( Trust Fund ) sponsored jointly by the Union and (Name of Employer Sponsor). WHEREAS, Union wants to promote and encourage such individuals to serve as Trustees of Trust Funds; RESOLVED, Union shall indemnify any person serving or formerly serving as a Unionappointed Trustee who is made or threatened to be made a party to a proceeding (including a civil, criminal, administrative, arbitration or investigative proceeding and including proceedings by or on behalf of the Trust Fund or the corporation) by reason of such person serving or formerly serving as such Union-appointed Trustee against judgments, penalties, fines, including, without limitation, excise taxes assessed against such person with respect to Trust Fund or corporation settlements, and reasonable attorneys fees and disbursements, incurred by such person in connection with the proceeding, if, with respect to the acts or omissions of the person complained of in the proceeding, the person: (1) Has not been indemnified by another organization, including an insurance company, for the same judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys fees and disbursements, incurred by the person in connection with the proceeding with respect to the same acts or omissions; (2) Acted in good faith; (3) Had reason to believe that the conduct was not opposed to the best interests of the Union; and (4) In the case of a criminal proceeding, had no reasonable cause to believe that the conduct was unlawful. The termination of a proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, establish that the person did not meet the criteria set forth in this resolution. FURTHER RESOLVED, Union shall pay, on behalf of Union-appointed Trustees, any fiduciary liability insurance premiums that may be required to provide recourse insurance protection in the event of recourse liability against any Union-appointed Trustee, as required by the Employee Retirement Income Security Act of FURTHER RESOLVED, that the foregoing resolutions shall be effective as of, 19, and shall continue to be effective unless and until rescinded by action of the of Union, which such rescission shall only be effective for actions or events arising after such rescission APPENDIX A