Prudent Man with a Plan

Most 401(k) reforms before Congress don't address a critical source of risk: fiduciary duty.

Typically, nonfiduciary duties associated with a plan include decisions related to the adoption, amendment, and termination of the plan, as well as ministerial administrative duties associated with the plan. (Ministerial duties are those that involve no exercise of discretion, such as compiling reports or financial data regarding the plan.)

At Procter & Gamble Co., the company’s three-man benefit policy committee has fiduciary responsibility to set policy and procedures used in administration of the company’s 401(k) plan. Tom Mess, P&G director of global business services and employee services, and the plan administrator, is not considered a fiduciary, he says, because his duties are purely ministerial and do not involve any independent decision-making authority. However, some courts have ruled that such a ministerial administrative role can cross the boundary into “discretionary” (and therefore be subject to fiduciary duty).

No wonder, then, that many companies routinely misinterpret the word fiduciary. And the implications of doing so are profound. For example, if the courts eventually determine that former Enron chairman Kenneth Lay was acting in a fiduciary capacity in August 2001 — when he sent two E-mails to employees reassuring them that Enron’s business was sound — then the company (or what’s left of it) could be on the hook for the amount that the employees lost in their retirement accounts.

Education in Prudence

Once fiduciaries are identified, they must be educated about exactly what their role entails. The general rule is this: fiduciaries are expected to meet the prudent-man standard in the execution of their duties, which must always be conducted for exclusive benefit of participants and beneficiaries. Obeying this rule can be complicated, but companies can take some basic steps that will reduce the likelihood of stepping on ERISA land mines, say experts.

“Get some good education about what ERISA requires you to do” at various functional levels, advises Turk-Meena. “And make sure there are processes in place that are a check and a counterbalance to discretionary authority so it’s hard for anyone to act as a renegade.” Failure to do so could open up a company or plan fiduciary to allegations of lack of prudence, she adds.

It’s not crucial that everyone who is a fiduciary “have a college degree in ERISA,” observes Steinhour. “It’s OK to appoint someone who doesn’t have expertise and background in it, but you must make available to that person the resources and people who can help them. If you don’t do that, it’s an imprudent appointment.”

The most pernicious source of fiduciary confusion is when the fiduciary is also an executive with insider information about the company. Experts say it’s a bad idea to appoint a senior executive with inside information as a plan fiduciary. This is because ERISA requires that plan fiduciaries act for the sole benefit of plan participants — a requirement that sometimes runs counter to the best interests of the corporation. Even when such dual roles are avoided, senior executives who are not fiduciaries may slip into that role if they simply act as a fiduciary — as some believe was the case when Lay told employees that Enron’s fundamentals were fine.


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