Avoiding Liability for a "Failure to Monitor" an Appointed Investment Manager Under ERISA

An ERISA fiduciary’s duty to monitor the activities of its appointed fiduciaries is an important obligation that the fiduciary must appropriately implement to avoid a breach of fiduciary liability claim under ERISA. The case of Perez, Secretary of Labor v. WPN Corp., Ronald Labow, Severstal Wheeling, Inc. Retirement Committee et. al., No. 14-1494, Federal Court for the Western District of Pennsylvania, underscores the importance of meeting these duties and provides guidance on how to avoid liability for such claims.


In this case the U.S. Department of Labor (“DOL”) filed a lawsuit in 2014 to protect the participants in two related pension plans that Severstal Wheeling, Inc. sponsored


The defendants included the Severstal Wheeling, Inc. Retirement Committee – the plan administrator and named fiduciary under the plan documents, its two individual members – also named fiduciaries (referred to herein as the “plan defendants”), and an individual and company (referred to herein as the “investment manager defendants”) that the Retirement Committee and its two individual members appointed to manage the assets of the two plans.


The DOL alleged that the fiduciaries and investment managers of these two plans violated ERISA causing a loss of the pension plans’ value of approximately $7 million. The DOL alleged that the plan defendants were liable for failing to invest the assets of the plans and for failing to monitor the investment manager defendants during a specified period of time and for co-fiduciary liability of the investment manager defendants’ violations.


The plan defendants filed a Motion to Dismiss. In a Memorandum Opinion dated June 7, 2017, the court granted the Motion in part relating to the failure to invest and co-fiduciary liability and denied the Motion in part relating to the failure to monitor.


This case addresses several important issues that guide a plan fiduciary’s conduct. This article will focus on the duty to monitor an appointed plan fiduciary.


Fundamental to the establishment of a pension plan covered by ERISA, the plan’s written plan document must provide for one or more named fiduciaries who jointly or severally have authority to control and manage the operation and administration of the plan. The plan administrator is typically designated as a “named fiduciary” in the plan document and the default plan administrator, unless another person or entity is designated.


A plan administrator has obligations over two major areas of plan operations, including the day-to-day management of the plan, such as managing participant accounts, and second, management of the assets of the plan unless that obligation has been given to a trustee or otherwise delegated. The plan administrator typically engages a service provider to handle plan operations, such as maintaining participant information, benefit recordkeeping and payments, and in doing so, must navigate the requirements of ERISA in establishing that relationship. The plan administrator, as a named fiduciary, may be involved with selecting appropriate investments for plan assets or appointing one or more investment managers to handle investment related duties. Much has been written on the due diligence that a plan administrator must use leading up to the selection of a service provider, investments or the appointment of an investment manager, but the diligence does not end as seen in this case.


The Duty to Monitor


In finding that a duty to monitor applies, the court relied on prior case law for the proposition of law that “the power to appoint and dismiss an investment fiduciary ‘carries with it a duty to monitor appropriately’ those subject to removal.” “An appointing authority is not exposed to liability unless something ‘put [them] on notice of possible misadventure by their appointees.’”


On the scope of that duty, the court cites the DOL’s regulatory questions and answers found at 29 C.F.R. Sec.2509.75-8, FR 17 which state:


Q: What are the ongoing responsibilities of a fiduciary who has appointed trustees or other fiduciaries with respect to these appointments?

A: 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.


The court references a DOL amicus brief in which it argued that “in most cases, it will be enough that [appointing fiduciaries] adopt and adhere to routine procedures sufficient to alert them to deficiencies in performance which could require corrective action . . .” The court stated that “the time for review of monitoring procedures is measured under a standard of reasonableness.”


The court concluded that “the minimum requirement is that the appointing fiduciary imposes a regular monitoring procedure” and that the DOL guidance requires, “under the applicable facts and circumstances, the following:

  • the appointing authority must adopt routine monitoring procedures;

  • the appointing authority must adhere to the routine monitoring procedures;

  • the appointing authority must review the results of the monitoring procedures;

  • the monitoring procedures must alert the appointing authorities to possible deficiencies; and

  • the appointing authority must act to take required corrective action.”


Having so ruled, the court appears to accept the DOL’s argument that direct oversight is not required, but merely having a routine monitoring procedure is insufficient unless the fiduciary reviews and evaluates what the procedures generate and if needed, takes corrective action.


Facts Alleged by the DOL


The plans’ assets were part of a larger trust that the investment manager defendants managed. That trust was set to cease effective at the end of 2008 requiring the spin-off and investment of those assets in a standalone trust. During a period of about a month before the end of 2008, the plans assets were left in an undiversified account in the standalone trust. One of the Retirement Committee members acknowledged the transfer on the date of the transfer. The Retirement Committee entered into an investment management agreement with the investment manager defendants at the end of that period. The plans’ assets remained in the undiversified account from the signing date to a later date when they were sold for cash and thereafter remained in cash until a future date on which the investment manager defendants were fired. From being placed in the undiversified account through the date of investment, approximately six months, the DOL alleged that the plans suffered losses and lost earnings of about $7 million.


Conclusion


This case emphasizes that fulfilling fiduciary duties requires more than the due diligence needed to make the fiduciary appointment in the first instance. It requires the implementation of appropriate procedures for the matter at-hand, following those procedures and reviewing the results of those procedures, and if needed, taking corrective action. The timing of this process will depend on the nature of the relationship being reviewed.


Consistent with the overall approach to demonstrating appropriate fiduciary conduct, a plan fiduciary may be well-advised to work with legal counsel on fulfilling its duties through the monitoring of appointed investment advisors, but also, in other aspects of plan administration over which the fiduciary has obligations that could result in material liability. In the event of an investigation by the DOL, plan fiduciaries who demonstrate prudent procedures and compliance with those procedures could go far in avoiding a claim of a breach of fiduciary duty.


If you have questions or would like our advice with respect to any of this information, please contact us.


© Boutwell Fay LLP 2017, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of July 28, 2017.



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