The DOL Promulgates the Final Fiduciary Regulation

By Joseph A. Garofolo

On April 8, 2016, the Department of Labor promulgated a final regulation regarding ERISA’s definition of fiduciary.  The final regulation becomes applicable on April 10, 2017, and is available here.  

There were a number of changes between the proposed regulation published on April 20, 2015 and the final regulation.  The Department provided a chart summarizing changes made in response to the following issues raised in connection with the proposed regulation: the distinction between education and investment advice, the applicability of the regulation to health and welfare arrangements and appraisals, whether “hire me” recommendations are subject to ERISA’s fiduciary standards, the applicability of the Best Interest Contract Exemption (the “BICE”) (a class prohibited transaction exemption) to small plans and all asset classes, disclosure requirements under the BICE, the applicability of the contract requirement to ERISA plans and arrangements not subject to ERISA (including individual retirement accounts “IRAs”), the application of the regulation to call centers, web disclosure and data retention requirements, recommendations relating to proprietary products, lifetime income products, and level fee arrangements, fee-based account conversions, bias toward products with low fees, grandfather relief, and concerns regarding regulation implementation.  The Department’s chart is available here.

Finally,  on April 8, 2016, the Department promulgated the following exemptions relating to prohibited transactions under ERISA and the Internal Revenue Code of 1986, as amended: i) the BICE (the Best Interest Contract Exemption); ii) Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs; iii) Amendment to Prohibited Transaction Exemption (PTE) 75-1, Part V, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers and Banks; iv) Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 86-128 for Securities Transactions Involving Employee Benefit Plans and Broker-Dealers; Amendment to and Partial Revocation of PTE 75-1, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefits Plans and Certain Broker-Dealers, Reporting Dealers and Banks; v)
Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1; and vi) Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters.  These documents can be accessed here.

While the retirement plan community continues to analyze the final regulation and its related exemptions, it is safe to say that many investment advisers and participants will be affected by the significant changes made to the Department’s interpretation of “investment advice” as that phrase is used in ERISA § 3(21)(A)(ii).  

Expert Testimony Regarding the ERISA Fiduciary Standard of Care

By Joseph A. Garofolo

Courts regularly allow ERISA expert testimony relating to the fiduciary standard of care, especially in complex cases.  See, e.g., In re Reliant Energy ERISA Litig., 2005 U.S. Dist. LEXIS 48034, at *3, *7-*8 (S.D. Tex. Aug. 19, 2005); Smith v. Sydnor, 2000 U.S. Dist. LEXIS 20074, at *57-*58 (E.D. Va. Aug. 25, 2000); Flanigan v. GE, 93 F. Supp. 2d 236, 242-243 (D. Conn. 2000).  As explained by one court when rejecting an effort to exclude testimony that an ERISA fiduciary breached its duties, “expert witnesses, in all types of litigation, render an opinion as to what the applicable standard of care is and whether it has been complied with.”  Harris v. Koenig, 2011 U.S. Dist. LEXIS 51860, at *6 (D.D.C. May 16, 2011).

Moreover, the vast majority of ERISA fiduciary breach cases are heard by a judge.  And courts in most federal circuits have recognized that there is a relaxed standard for admissibility of expert testimony in bench trials.  See, e.g., United States v. Wood, 741 F.3d 417, 425 (4th Cir. 2013); David E. Watson, P.C. v. United States, 668 F.3d 1008, 1015 (8th Cir. 2012); Att’y Gen. of Okla. v. Tyson Foods, Inc., 565 F.3d 769, 779 (10th Cir. 2009); United States v. Brown, 415 F.3d 1257, 1268 (11th Cir. 2005); Deal v. Hamilton Cnty. Bd. of Educ., 392 F.3d 840, 852 (6th Cir. 2004); Serby v. First Alert, Inc., 2015 U.S. Dist. LEXIS 95612, at *3 (E.D.N.Y. July 22, 2015); Wolkowitz v. Lerner, 2008 U.S. Dist. LEXIS 34698, at *5 (C.D. Cal. Apr. 21, 2008).

Thus, in addition to the fact that fiduciary breach cases are often complex, there is a significant likelihood that competing expert testimony will be heard by a judge in ERISA cases, including litigation involving 401(k) plans and employee stock ownership plans.




Designation of a Named Fiduciary

By Joseph A. Garofolo

ERISA §§ 402(a)(1) and (2) require a plan to designate, or provide a procedure for designating, one or more named fiduciaries “who jointly or severally shall have authority to control and manage the operation and administration of the plan.”  The designation of a named fiduciary or fiduciaries can become important in 401(k) plan fiduciary breach and other ERISA litigation because it effectively forecloses the person or persons so designated from arguing that they are not fiduciaries with attendant duties.

But how specific does the designation of a named fiduciary have to be?

Fortunately, the Department of Labor provided early interpretive guidance, now codified in 29 C.F.R. § 2509.75-5, relating to this issue.  This guidance, issued in 1975, answers three basic questions relating to the designation of named fiduciaries.

First, the Department indicated yes in response to the question of whether the designation of a committee by position or by individual satisfies the requirements of ERISA § 402(a).

Second, with regard to a collectively bargained plan, the Department explained that ERISA § 402(a) is satisfied if a “joint board is clearly identified as the entity which has authority to control and manage the operation and administration of the plan.”  29 C.F.R. § 2509.75-5, FR-2.  The Department continued that each member of the joint board would be a named fiduciary under such a situation.

And, third, the Department confirmed that a plan may name a corporation/plan sponsor as the named fiduciary.  The Department indicated that the plan instrument designating the corporation “should provide for designation by the corporation of specified individuals or other persons to carry out specified fiduciary responsibilities under the plan, in accordance with section 405(c)(1)(B) of the Act.”  29 C.F.R. § 2509.75-5, FR-3.

Early Department of Labor interpretative guidance is often a good place to start when seeking clarification regarding fundamental fiduciary responsibilities.   




ERISA’s Fiduciary Duty to Monitor

By Joseph A. Garofolo

In Tibble v. Edison International, 135 S. Ct. 1823 (2015), the Supreme Court clarified the applicability of ERISA’s statute of limitations to the fiduciary duty to monitor.  The plaintiffs alleged that fiduciaries violated the duty to monitor investments by continuing to offer retail-class mutual funds to 401(k) plan participants as opposed to institutional-class funds with lower fees.  The Court held “that the duty of prudence involves a continuing duty to monitor investments and remove imprudent ones” and that a breach of the duty to monitor occurring within ERISA’s statute of limitations was sufficient to hold that plaintiffs’ fiduciary breach claims were not time barred.  Id. at 1829.

While Tibble involved the duty to monitor 401(k) plan investments, another important fiduciary duty to monitor exists with regard to the appointment of plan fiduciaries and the selection of service providers to plans.  The Department of Labor has explained the following:

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.

 29 C.F.R. § 2509.75-8, FR-17.

The Department has made it clear that the “reasonable intervals” standard also applies to monitoring plan service providers.  See

Notably, the duty to monitor is part of a fiduciary’s obligations under ERISA § 404(a)(1).  Indeed, consistent with the Supreme Court’s analysis in Tibble, some courts have held that it is part of the duty of prudence.  However, the duty to monitor should not be confused with co-fiduciary duties under ERISA § 405(a)—that section requires the elements of one of its subsections (e.g., knowledge of a fiduciary breach by another without making reasonable remedial efforts) whereas those elements are not required to be satisfied in order for a breach of ERISA § 404(a)(1) to occur.

Notwithstanding the difference between the duty to monitor and co-fiduciary duties, it is critical for fiduciaries to understand both, as ERISA is not forgiving to fiduciaries who are unware of their responsibilities.


A Touch of Grey—ERISA Remains a Complex and Evolving Statute After 40 Years

By Joseph A. Garofolo

To celebrate ERISA’s 40th anniversary and for EES’s inaugural blog, here are 10 observations relating to the landmark statute:

1.  ERISA was signed into law by President Gerald Ford on September 2, 1974, but most of its provisions took effect on January 1, 1975.  After coming out of conference committee, the House of Representatives passed ERISA by a vote of 407-2 on August 20, 1974.

2.  As originally enacted, ERISA § 502 set forth six civil statutory causes of action.  See ERISA §§ 502(a)(1)-(6).  As amended, ERISA currently provides for ten civil statutory causes of action.  See ERISA §§ 502(a)(1)-(10).

3.  The Secretary of Labor has been a party to a number of seminal cases that contributed to the development of ERISA jurisprudence.  See, e.g., Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979); Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982); Donovan v. Mazzola, 716 F.2d 1226 (9th Cir. 1983); Donovan v. Cunningham, 716 F.2d 1455 (5th Cir. 1983).

4.  The Fifth Circuit has recognized that “a pure heart and empty head” are not enough to satisfy ERISA’s fiduciary duties.  Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983).

5.  According to the Fifth Circuit, ERISA’s prudence standard does not require a fiduciary to conduct himself or herself as a prudent expert: “Some commentators have suggested that the reference in Section 404 to a prudent man ‘familiar with such matters’ creates a ‘prudent expert’ standard under ERISA. . . . However, a review of the relevant history of Section 404 does not support this view; rather, it confirms that the emphasis of Section 404 is on flexibility.”  Donovan v. Cunningham, 715 F.2d 1455, 1467 n.26 (5th Cir. 1983) (citations omitted).

6.  In Donovan v. Bierwirth, the Second Circuit explained that a fiduciary’s decisions “must be made with an eye single to the interests of participants and beneficiaries.”  680 F.2d 263, 271 (2d Cir. 1982) (citations omitted).

7.  The Ninth Circuit has observed that ERISA’s prudence standard is derived from the common law of trusts, but that it must be interpreted “bearing in mind the special nature and purpose of employee benefit plans.”  Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th Cir. 1983).

8.  The Supreme Court has described ERISA’s preemption clause as “conspicuous for its breadth,”  FMC Corp. v. Holliday, 498 U.S. 52, 58 (1990), and the Ninth Circuit has noted that “ERISA contains one of the broadest preemption clauses ever enacted by Congress.”  PM Group Life Ins. v. W. Growers Assur. Trust, 953 F.2d 543, 545 (9th Cir. 1992).

9.  Health and welfare plans covered by ERISA are not exempt from its fiduciary duty provisions.

10.  Since ERISA was enacted, there have been 14 Secretaries of Labor (not including Acting Secretaries): Peter J. Brennan (1973-1975/Nixon); John T. Dunlop (1975-76/Ford); W.J. Usery, Jr. (1976-77/Ford); Ray Marshall (1977-81/Carter); Raymond J. Donovan (1981-85/Reagan); William E. Brock (1985-87/Reagan); Ann Dore McLaughlin (1987-89/Reagan); Elizabeth Hanford Dole (1989-90/Bush); Lynn Morley Martin (1991-93/Bush); Robert B. Reich (1993-97/Clinton); Alexis M. Herman (1997-01/Clinton); Elaine L. Chao (2001-09/Bush); Hilda L. Solis (2009-13/Obama); and Thomas Perez (2013-present/Obama).