Fiduciary Responsibilities in the Face of ERISA

Abstract

In the early 1960’s, Americans began to notice a problem with the way in which many employee benefit plans were being managed, and how the funds of those plans were ultimately being distributed. The problem arose when companies failed and many of those companies’ retirement benefit plan participants received pennies on the dollar compared to what they were promised upon their joining the plan; that is, if they received anything at all. Both President John F. Kennedy and members of the Senate recognized this problem and began to take steps to help create a solution by forming committees and proposing legislation, which ultimately led to President Gerald Ford signing the Employee Retirement Income Security Act of 1974 (“ERISA”) into law on September 2, 1974. Up until 1984, this Act saw very little litigation, especially related to breaches of fiduciary duties. There were, however, two distinct approaches that formed to the question of whether a breach occurred. In the landmark case of Leigh v. Engle the court faced that very question. There, the court analyzed these two approaches stating that “[the] first avenue focuses on the potential for conflicts of interest between the fiduciaries and the plan beneficiaries.... The second avenue involves a broader inquiry into the fiduciaries' actions where they may have substantial interests in a control contest.” Ultimately, the court unified the two approaches, adding in a third influence, by laying out a set of non-exhaustive factors to determine whether a breach occurred. These factors are:(1) The risk of conflicts between the interests of the fiduciaries and beneficiaries; (2) Whether fiduciaries with divided loyalties make an intensive and scrupulous investigation of the plan's investment options; and (3) Whether there is consistent management of plan assets in congruence with the fiduciaries' personal interests over a substantial period of time in control contests Leigh v. Engle, 727 F.2d 113.Since these factors were laid out, they have been adopted in every federal circuit court that has heard a case on the issue. Recently, courts have started shifting their focus from the first Leigh factor, involving the risk of potential conflicts, to the second factor requiring the fiduciary to administer an investigation into potential alternatives. This shift creates a positive environment for those directors who decide to retain an incident of management of an ERISA plan, and embrace the fiduciary responsibilities that follow such a decision. Courts should continue this shift and ultimately arrive at an “ERISA Judgment Rule” to allow directors who do retain fiduciary duties to make decisions in their role as a director without fear of litigation around every corner, so long as they conduct a thorough investigation into the possible alternatives.This article begins with a description of ERISA and why it is important. It continues with the fiduciary duties required under the Act, the ways to approach avoiding liability, and a description of the “ERISA Judgment Rule,” including support for its adoption. Finally, it finishes with a look at the consequences for a breach and a brief conclusion.