ERISA Newsletter - 4 th Quarter, 2011 - Volume 2, Number 4

Fiduciary or Not Fiduciary? That is a Difficult Question

By Nicole M. Wotlinski

If you are an employer, plan administrator, or financial advisor, how can you tell whether you are a fiduciary as defined by ERISA? There is a myriad of case law addressing this exact issue, but still, bright line rules are difficult to identify.

Express or Implied Status

Fiduciary status can be created in two ways. First, fiduciary status is created if a person or persons are expressly named as fiduciaries in the plan documents. 29 U.S.C. § 1102 (a). If not named specifically in the plan, fiduciary status can be created through action to the extent a party: (1) exercises any discretionary authority or control regarding management of a plan or exercises any authority or control respecting management or disposition of its assets; or (2) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so; or (3) has any discretionary authority or discretionary responsibility in the administration of such plan. 29 U.S.C. § 1002(21)(A). Thus, the concept of fiduciary under ERISA is broader than common law concept of trustee and it includes not only those named as fiduciaries in the plan or those who, pursuant to procedure specified in the plan, are identified as fiduciaries, but any individual who de facto performs specified discretionary functions with respect to management, assets, or administration of plan. Custer v. Sweeney, 89 F.3d 1156, 1161 (4th Cir. 1996).

Not every action taken by an employer rises to the level of fiduciary status. Bendaoud v. Hodgson, 578 F. Supp. 2d 257, 276 (D. Mass. 2008). Thus, the threshold inquiry is "whether that person was acting as a fiduciary (that is, performing a fiduciary function) when taking the action subject to complaint." Pegram v. Herdrich, 530 U.S. 211, 226, 120 S. Ct. 2143, 147 L. Ed. 2d 164 (2000).

For instance, courts have found that day-to-day business decisions by an employer that may affect a retirement or pension plan do not necessarily give rise to fiduciary status. See, e.g., Berger v. Edgewater Steel Company, 911 F.2d 911, 915 (3rd Cir. 1990) (holding that an employer's decision to refuse to grant retirement benefits during a difficult financial time was a business decision that did not implicate fiduciary duties); Flanigan v. General Electric Co., 242 F.3d 78, 88 (2nd Cir. 2001) (a selling company's decision to transfer pension funds in a spinoff did not implicate fiduciary duties under ERISA); Dzinglski v. Weirton Steel Corp., 875 F.2d 1075, 1079 (4th Cir. 1989) ("[b]usiness decisions can still be made for business reasons, notwithstanding their collateral effect on prospective, contingent employee benefits."); Ames v. American Nat'l Can Co., 170 F.3d 751, 757 (7th Cir. 1999) (when company representatives are negotiating the sale of a division, they are not acting in their capacity as a plan fiduciary, and thus they do not bear the legal obligations that go along with fiduciary status.).

Moreover, employers are generally afforded wide latitude to design the plan, including the mechanism for distributing benefits, as they see fit without ERISA fiduciary implications. See, e.g., Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 444, 1119 S. Ct. 755, 142 L. Ed. 2d 881 (1999) (plan sponsor not an ERISA fiduciary in making decisions regarding design of the plan); Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78, 131 L. Ed. 2d 94, 115 S. Ct. 1223 (1995) (holding that "employers or other plan sponsors are generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans.").

Additionally, mere influence as an employer over decision-making fiduciaries is not enough to establish fiduciary status. See In re La.-Pac. Corp. ERISA Litig., No. 02-1023-KI, 2003 U.S. Dist. LEXIS 7645, at *16 (D. Or. Apr. 24, 2003) (exercising influence on officers who are themselves fiduciaries is insufficient to trigger fiduciary status, as "courts have held that fiduciary status is based on actual decision-making power" rather than on influence over decisions made by a plan trustee (citations omitted)). See also Crowley v. Corning, Inc., 234 F. Supp. 2d 222, 228- 29 (W.D.N.Y. 2002) (dismissing claim against company based on respondeat superior liability where a plan committee comprised of company officers was responsible for managing plan assets); Gelardi v. Pertec Computer Corp., 761 F.2d 1323, 1325 (9th Cir. 1985) overruled on other grounds, Cyr v. Reliance Std. Life Ins. Co., 642 F.3d 1202, 1207 (9th Cir. 2011) ("ERISA anticipates that employees will serve on fiduciary committees but the statute imposes liability on the employer only when and to the extent that the employer himself exercises the fiduciary responsibility allegedly breached.").

ESOP Rules

A different standard applies for determining fiduciary status pertaining to an Employee Stock Ownership Plan, or ESOP. As the court stated in Eckelkamp v. Beste, 201 F. Supp. 2d 1012, 1021-22 (E.D. Mo. 2002), this is because all-important business decisions necessarily have an effect on the company's stock:

ESOPs are unique creatures in that there will always exist an overlap between corporate conduct and fiduciary...