Should I Care About Fiduciary Responsibility if my Organization's Benefit Plan is Exepmt from ERISA?

Plan sponsors of employee benefit plans that are subject to ERISA are likely familiar with the requirements that ERISA imposes on plan fiduciaries. ERISA requires a plan fiduciary to “discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries andfor the exclusive purpose of: (i) providing benefits to participants and their beneficiaries (the “exclusive benefit rule”); and (ii) defraying reasonable expenses of administering the plan.” ERISA also requires that fiduciaries discharge their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims,” and “by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.” A substantial body of law has developed around the fiduciary requirements under ERISA, including regulations and other guidance from the Department of Labor (the primary regulator for Title I of ERISA) and through many court decisions.


Not every employee benefit plan is subject to ERISA. In particular, governmental plans and church plans, as defined in ERISA, are exempt from coverage under the statute. But this does not mean that the administrators of these plans are free from any rules that establish fiduciary responsibility and govern their oversight and operation of their plans. State laws fill the vacuum left by the ERISA exemptions and establish their own standards of fiduciary responsibility. If you are a plan sponsor or administrator of a plan exempt from ERISA, it is important that you familiarize yourself with the applicable laws of your state imposing fiduciary responsibility. These rules are usually more general than those of ERISA and have been subject to fewer court interpretations, but state fiduciary rules impose important obligations and constraints on the fiduciaries of non-ERISA plans.


It is not a coincidence that many state laws establishing rules for fiduciaries bear a resemblance to the ERISA fiduciary requirements. ERISA was developed out of the state law of trusts, and its drafters took many of its fundamental principles from state requirements for trustees. Then, subsequent to the enactment of ERISA, some states implemented statutes imposing fiduciary requirements that were modeledonthe language of ERISA. As a consequence, state fiduciary rules have similar themes to ERISA, if not very similar language. States typically charge fiduciaries with a duty of loyalty to plan participants, the requirement that the fiduciary act for the exclusive benefit of participants, and to act in accordance with a prudent person or prudent investor standard, all of which are similar to the principles informing ERISA.


Where can you find your state’s fiduciary rules? Some states have provisions in their constitutions that impose fiduciary requirements on governmental plans. For example, California’s constitution added provisions in 1992 that established fiduciary standards for governmental plans and track closely to ERISA. Article XVI, section 17 of the California constitution states that “The assets of a public pension or retirement system are trust funds and shall be held for the exclusive purposes of providing benefits to participants in the pension or retirement system and their beneficiaries and defraying reasonable expenses of administering the system”. The same section of the constitution also provides that fiduciaries “act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims”.


Other state requirements are found in the state laws of trust, either in the statute or as developed by the courts as common law. For example, New York’s Estate Powers and Trust Law (“EPTL”) imposes a prudent investor standard on fiduciaries, and directs them to “exercise reasonable care, skill and caution to make and implement investment and management decisions as a prudent investor would for the entire portfolio, taking into account the purposes and terms and provisions of the governing instrument”. Similarly, Massachusetts General Laws requires that a trustee administer a trust “solely in the interests of the beneficiaries” and to “administer the trust as a prudent person would, considering the purposes, terms and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill and caution”.


Because of these similarities, it is often a best practice for plans that are not subject to ERISA to adopt processes that meet with ERISA’s prudence standards when developing fiduciary procedures. Given that state courts sometimeslook to ERISA for guidance when adjudicating state claims of fiduciary responsibility, adopting standards that follow ERISA’s requirements can be beneficial. However, state fiduciary laws are usually much more general than ERISA, without the voluminous regulations and interpretations by the DOL and the courts. You need to consider whether voluntarily imposing more stringent ERISA standards on your plan design or operation than is required by state law is appropriate in every situation.


Therefore, although your employee plan may be exempt from ERISA, it doesn’t mean that there are no constraints on its administration. In lieu of ERISA’s requirements, state laws will generally impose a duty to operate the plan with prudence and in the best interests of its participants.


It is also important to keep in mind that being exempt from ERISA doesn’t mean that the plan is exempt from many other rules that apply to employee benefit plans under the Internal Revenue Code (“Code”). Some Code provisions exempt the types of plans that are not covered by ERISA, but there are many rules that do apply to them. For example, Code section 401(a)(2) imposes its own exclusive benefit rule that applies to qualified retirement plans. As another example, the Code and regulations generally require that retirement plans (as well as other types of benefit plans) must be in writing. For many reasons, written plan documents need to be crafted carefully, including because they can create enforceable contractual obligations binding the plan sponsor.


If you have any questions about this article, please contact a Boutwell Fay attorney.


© Boutwell Fay LLP 2018,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 August 31, 2018.



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