To what extent are directors fiduciaries under ERISA and charged with monitoring the appointment of fiduciaries under ERISA? That is the question being debated again and again in the latest wave of ERISA cases. In the In re: WorldCom, Inc. ERISA Litigation, the DOL filed an Amicus Brief discussing this issue. You can read the press release here. The DOL states its position in the press release:
The department’s brief argues that appointing fiduciaries have an obligation to periodically monitor the work of those they appoint, and to take appropriate action if the appointees’ conduct falls short of ERISA’s standards. The brief stresses, however, that appointing fiduciaries are not guarantors of the actions or of the success of the investment decisions made by the fiduciaries they appoint. Rather, the obligation of appointing fiduciaries is to make appointment and removal decisions with prudence and loyalty, and to periodically monitor the performance of those they appoint. Appointing fiduciaries have an important responsibility to implement reasonable procedures to review and evaluate the performance of appointees on an ongoing basis.
The courts have in the last year been forced to focus again and again on this issue of when directors should be liable under ERISA for a failure to monitor. Here are a few of the cases and what they have said:
- In re: WorldCom, Inc. ERISA Litigation: In the first round of motions to dismiss by defendants, the court addressed the plaintiffs’ contention that members of the Board of Directors for WorldCom were fiduciaries. According to the plaintiffs’ argument, the Plan had named WorldCom as the appointing fiduciary, and therefore under corporate law, the Board had supervisory authority and therefore a duty to monitor under ERISA. The court, however, held that the complaint did not sufficiently allege that “the Director Defendants functioned as ERISA fiduciaries” and said that the plaintiffs’ argument had gone too far.
- In re: Williams Cos. ERISA Litigation: The DOL filed an amicus brief in the case, advocating this duty to monitor on the part of the Board under ERISA, but apparently lost the argument as reported in an unpublished decision on October 27, 2003. The DOL comments on the result in the Williams case in its WorldCom Amicus Brief:
The Williams decision misapprehended the Secretary’s position, however, and is contrary to the weight of precedent. Thus, the Secretary believes that the decision in Williams was simply wrong, and should be accorded no weight by this Court.
- Tittle v. Enron Corp., 2003 WL 22245394 (S.D. Tex. Sept. 30, 2003): The court in Enron held that the directors did have a duty to monitor, and distinguished the result in WorldCom stating:
This Court finds that the facts in the case before Judge Cote {e.g. WorldCom] can be easily distinguished from those in Tittle. . . this Court has cited a number of opinions holding that the exercise of the power to appoint, retain and remove persons for fiduciary positions triggers fiduciary duties to monitor the appointees. Moreover in WorldCom, Worldcom did not appoint anyone as a fiduciary and there apparently were no allegations that Director Defendants functioned as fiduciaries, i.e., actually appointed persons to or removed persons from such positions. In Tittle, on the other hand, Defendants did appoint fiduciaries who, in turn, exercised discretionary authority or control over the plan and allegedly breached their fiduciary duties, while Director Defendants allegedly failed in their duty to monitor those appointed.
Just how far does the DOL go in this assertion that directors must monitor the ERISA fiduciaries who are appointed? The DOL provides some clarification in its Amicus Brief:
[A]ppointing fiduciaries are not charged with directly overseeing the investments and thus duplicating the responsibilities of the investment fiduciaries whom they appoint. At a minimum, however, the duty of prudence requires that they have procedures in place so that on an ongoing basis they may review and evaluate whether investment fiduciaries are doing an adequate job (for example, by requiring periodic reports on their work and the plan’s performance, and by ensuring that they have a prudent process for obtaining the information and resources they need.) In the absence of a sensible process for monitoring their appointees, the appointing fiduciaries would have no basis for prudently concluding that their appointees were faithfully and effectively performing their obligations to plan participants or for deciding whether to retain or remove them. The Secretary does not suggest that the appointing fiduciaries must follow one prescribed set of procedures for monitoring the investment fiduciaries, but that they apply procedures that allow them to assure themselves that those they have entrusted with discretionary authority to invest the plan’s assets are properly discharging their responsibilities.
This is basically the same position declared by the DOL in its Interpretive Bulletin at Reg. section 2509.75-78:
D-4 Q: In the case of a plan established and maintained by an employer, are members of the board of directors of the employer fiduciaries with respect to the plan?A: Members of the board of directors of an employer which maintains an employee benefit plan will be fiduciaries only to the extent that they have responsibility for the functions described in section 3(21)(A) of the Act. For example, the board of directors may be responsible for the selection and retention of plan fiduciaries. In such a case, members of the board of directors exercise “discretionary authority or discretionary control respecting management of such plan” and are, therefore, fiduciaries with respect to the plan. However, their responsibility, and, consequently, their liability, is limited to the selection and retention of fiduciaries (apart from co-fiduciary liability arising under circumstances described in section 405(a) of the Act). In addition, if the directors are made named fiduciaries of the plan, their liability may be limited pursuant to a procedure provided for in the plan instrument for the allocation of fiduciary responsibilities among named fiduciaries or for the designation of persons other than named fiduciaries to carry out fiduciary responsibilities, as provided in section 405(c)(2).
. . .
FR-17 Q: What are the ongoing responsibilities of a fiduciary who has appointed trustees or other fiduciaries with respect to these appointments?A: At reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan. No single procedure will be appropriate in all cases; the procedure adopted may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the procedure.
It will be interesting to follow the case law’s development with respect to this issue and to see how far the courts are willing to go down this road of holding directors personally liable for failure to monitor appointed fiduciaries under ERISA.