In this issue of The Benefits Professional Update, Joseph C. Faucher, a litigation partner in the law firm Reish & Luftman, continues discussion of liability issues that face retirement and welfare plan service providers. With the Pension and Welfare Benefit Administration expanding its pursuit of service providers as a means of restoring plan assets, understanding fiduciary status and related consequences of appearing to cross the line is an important element in any risk management plan.
In the last edition of The Benefits Professional Update, we outlined the theories of liability that are most often pursued against retirement and welfare plan service providers. In a nutshell, those theories are (1) that the service provider is a "fiduciary" as defined by the Employee Retirement Income Security Act of 1974 ("ERISA"), and has breached its fiduciary duty to the plan, or (2) that the service provider has acted negligently in violation of the law of the state in which it practices, or the state in which the subject plan is located.
You might think that it makes little difference which theory a plaintiff pursues, since either way, you could be liable for a judgment. That's true - to a point. But a finding that a service provider is a fiduciary has some significant consequences. For instance, fiduciaries are in some circumstances liable for damages occurring as a result of breaches of fiduciary duty by other fiduciaries. This so-called "co-fiduciary" liability is reason enough to avoid fiduciary status if at all possible. Once it is determined that you are a fiduciary to a plan, you have an obligation to monitor the actions of other fiduciaries. If you conclude that another fiduciary is not acting according to the fiduciary standard of care, and solely in the interest of plan participants and beneficiaries, you have an obligation to rectify the situation. This may include the obligation of taking action to remove the co-fiduciary, or to sue the co-fiduciary for breach of fiduciary duty. If you fail to take the appropriate corrective action, you could be liable for a breach of your fiduciary duty.
Another consequence of fiduciary status that service providers don't often consider is that it exposes the service provider to claims not only by the plan sponsor, participants and beneficiaries, but claims by the United States Secretary of Labor as well.
Although much, if not most, ERISA litigation consists of private litigation between participants, beneficiaries, and purported fiduciaries, a significant amount of that litigation is commenced by the Pension and Welfare Benefit Administration ("PWBA") of the United States Department of Labor ("DOL"). Those who find themselves named as defendants in actions filed by PWBA are often in a troublesome position - this is especially so for those who are uninsured or underinsured. In one sense, PWBA is understaffed, inasmuch as the agency is required to monitor literally hundreds of thousands of employee benefit plans across the country, and to enforce ERISA in the case of alleged breaching fiduciaries. However, in the context of any one case or any one plan, PWBA has tremendous resources with which to litigate. PWBA has at its disposal attorneys and investigators knowledgeable in ERISA. And, unlike its "civilian" counterparts, PWBA has little if any immediate downside in the event it litigates a case to its conclusion - and loses. While a loss may have some political consequences, and may set a negative precedent that PWBA would like to avoid, PWBA is not likely to settle a case simply because the cost of continued litigation is high in relation to the potential recovery. Therefore, defendants in private litigation are in a better position to negotiate than defendants in actions filed by PWBA.
Several years ago, PWBA announced that it intended to expand its pursuit of retirement plan service providers as a means of restoring assets available for distribution to plan participants and beneficiaries. One case that we are currently handling serves as an example of PWBA's stepped-up efforts against plan service providers. In that case, our client is a third party administrator ("TPA") and recordkeeper that provides services to a sponsor of a 401(k) plan. Plan participants are able to alter their investment allocations by using a voice-automated telephone system operated by the TPA. The TPA, in turn, communicates the participants' investment elections to an insurance company which holds the plan assets.
The plan sponsor, in this instance, sometimes delivered information to the TPA that was internally inconsistent. Additionally, it was sometimes delivered piecemeal. Because the payroll information from the sponsor was sometimes slow in coming or inaccurate on its face, the TPA occasionally encountered delays in conveying the allocation information to the insurance company. According to PWBA, the TPA requested in at least one instance that the insurance company hold the employee deferrals and company matching funds in a "suspense account" pending receipt and delivery of complete and accurate allocation information.
PWBA now asserts that the TPA became a plan fiduciary when the TPA influenced the way in which plan assets were invested. It claims that the TPA exercised discretionary authority over plan assets by (1) controlling the flow of allocation instructions between participants and the insurance company, and (2) requesting that the insurance company hold plan assets in an account that earned less interest than an alternative account that had apparently been specified for that purpose in the contract between the plan sponsor and the insurance carrier.
PWBA is alleging that the TPA breached its fiduciary duty to the plan, and is seeking to force the TPA to compensate the plan for any earnings that the plan lost as a result of any alleged delays in communicating allocation information, and as a result of its request that the insurance company segregate the plan assets in separate investments pending communication of asset information. Ultimately, PWBA would need to establish that the TPA exercised authority or control over plan assets. Our position is that neither (1) the act of communicating participant investment information, nor (2) the TPA's request that the insurance company segregate plan assets pending receipt and communication of participants' investment elections, gives rise to the authority or control necessary to create a fiduciary relationship between the TPA and the plan. (Indeed, the fact that PWBA referred to a "request" by the TPA suggests that the TPA had no actual discretion over plan assets or plan administration.) Absent fiduciary status, the TPA cannot be held liable for breach of fiduciary duty.
We believe that our position is the correct one, but it does not appear that there are any cases directly on point. The case presents what seems to be a novel legal issue. From the perspective of plan service providers, the case is not only an interesting (and potentially ominous) case study regarding theories of service provider liability, it also demonstrates yet another reason why it is meaningful and troubling to be labeled a fiduciary. If the TPA in this case is not a fiduciary, then PWBA has no authority to pursue the claim against the TPA on behalf of the plan. And, moreover, it is relatively unlikely that the plan sponsor or any plan fiduciary (as opposed to PWBA) would pursue such a "cutting edge" claim in most circumstances. With no cases directly on point, the likelihood of prevailing is probably too slim to justify costly litigation by a private party, in the absence of extraordinary losses to the plan.
Although we strongly disagree with the PWBA's position in this case, service providers should recognize that PWBA appears to be stepping up its efforts to label them as fiduciaries. In that uncertain climate, service providers should monitor their own actions closely. They should also make sure that they have adequate insurance coverage to protect themselves not only against state law negligence claims, but for claims of breach of fiduciary under ERISA. Finally, they should scrupulously document their files, especially when presented with delayed and/or incomplete information by plan sponsors.
Copyright 1999 by Professional Practice Insurance Brokers, Inc., a Hilb, Rogal & Hamilton Company. Reprinted with permission from The Benefits Professional Update, October 1999 (vol I, issue II).