Guest Article
The ERISA Fiduciary Tapestry: Torn and Tangled?
By Herbert A. Whitehouse. Mr. Whitehouse is Chief Fiduciary Officer at The Bogdahn Group of Orlando, FL. He can be reached at 407.246.7221 or herbw AT bogdahnconsulting.com.
ERISA can be compared to a vibrant tapestry; a tapestry that portrays a vision of unequaled truth and beauty. This tapestry was woven out of two select threads spun by Congressional artists in order to portray their vision for a safe and just employee benefits system. These two materials -- fiduciary management and equity jurisprudence -- when woven together created the fundamental structure of the ERISA fiduciary tapestry.
But this tapestry had an uncommon quality; it was to continue the weaving process on its own. The two principles -- fiduciary management and equity jurisprudence -- were to guide the ongoing development of a "common law" of ERISA. Some claim that this ongoing process has broken down, that the weave has become a tangled mess, and that Congress must reweave the ERISA tapestry with different kinds of threads. Others believe that the ERISA tapestry still has the power to govern employee benefit plans for the common good of society, including current participants and beneficiaries.
My view is that the ERISA tapestry is not torn and tangled; but rather, that its power to guide the management of employee benefit plans is too weak when the tapestry is left hanging on the wall. Fiduciary governance practitioners often speak of "wearing two hats." When the officer or director of a company acts as a fiduciary, he or she must remember to "put on his fiduciary hat." The fundamental problem with ERISA governance is that "changing hats" is not easy; and the assumption that changing hats will automatically transform the corporation or executive into a fiduciary is likely to be imprudent. The task ahead for the developing common law of ERISA will be to help determine when plan fiduciaries must wrap themselves more fully in the ERISA tapestry.
The ERISA fiduciary governance structure was intended to protect participants far more than the ancillary rules and regulations also contained in the law. Even the system of jurisprudence chosen to enforce ERISA's high fiduciary standards had historically been used to look behind technical forms of laws, transactions, and procedures. Courts of law had the power to act on title and legal ownership; but benefit plan participants have no legal title to any of the plan assets being managed for them. On the other hand, courts of equity applied their powers precisely when the technical laws and procedures of the law courts could not provide a just and fair result. The equity courts were keepers of conscience, not enforcers of rules.
Proper governance under ERISA was not to be based on the granting of legal rights; but rather, by principles of equity applied to a fiduciary governance structure.
Equitable remedies are distinguished by their flexibility, their unlimited variety, their adaptability to circumstances and the natural rules which govern their use. There is in fact no limit to their variety in application; the court of equity has the power of devising its remedy and shaping it so as to fit the changing circumstances of every case and the complex relations of all the parties.
Unfortunately, the ERISA tapestry is not much appreciated in the modern world where litigants find it strange that they can neither bypass the ERISA governance structure nor go to court seeking damages. Today, many attorneys, and even judges, see ERISA as an unjust and tangled mess. They do not see the beautiful tapestry of security and justice that the ERISA artists envisioned. For example, Justice Ginsberg has enthusiastically joined "the rising judicial chorus urging that Congress and [this] Court revisit what is an unjust and increasingly tangled ERISA regime." Aetna Health Inc. v. Davila, 124 S. Ct. 2488 (2004) (Ginsberg, J. concurring, quoting DiFelice v. Aetna U.S. Healthcare, 346 F.3d 442, 453 (3d Cir. 2003) (Becker, J., concurring)). The complaint is that ERISA has created a "regulatory vacuum," in which participants are without a remedy under ERISA, but state law remedies are totally preempted.
Certainly, participants are not protected when corporate officers and directors who are acting as fiduciaries fail to put on, or forget that they are wearing, fiduciary hats. But it is not the threads of the ERISA tapestry that have become tangled. Congress did not want to tie up employee benefit plans with the costs of individual litigation over damages. But individual litigants should not be surprised when they fail to prevail in legal causes of action against fiduciaries, or in actions against non-fiduciaries. Enforcing ERISA means enforcing the central and fundamental pattern in the ERISA tapestry; viz., the obligation of the named fiduciary to govern and direct other fiduciary and non-fiduciary managers and administrators. The "tangled" threads of the ERISA tapestry and its "regulatory vacuum" exist mostly in the eyes of those who can not see that ERISA's equity enforcement thread is intimately, and intentionally, tied to its fiduciary governance thread.
Moreover, following ERISA's fiduciary and enforcement threads will lead straight to whole gamut of State law remedies. Named fiduciaries are required to establish performance standards and contracts for managing both delegated fiduciary duties and the non-discretionary administrative tasks necessary for operating any benefit plan. And the fiduciary is obligated under ERISA to enforce these standards and contracts! ERISA has not preempted State law remedies; rather, ERISA demands that fiduciaries order plan management so that those remedies become available to the fiduciary on behalf of plan participants.
The problem with ERISA today is neither Justice Scalia nor the limitations of Chancery (equity) practice. The central problem is the focus on damages as redress for plan management problems after they occur, while neglecting the equity enforcement thread of the ERISA tapestry. ERISA fiduciary standards are among the highest ever established; and ERISA gave our Federal Courts a very flexible equity power to address violations of these ERISA standards, including fiduciary governance structures that make prudent decision making, solely in the interest of plan participants and with the skill of persons familiar with managing benefit plans, unlikely. See ERISA §§ 404 and 502. The other side of this same failure is that following the fiduciary governance thread of the ERISA tapestry makes it less likely that plan fiduciaries will be wearing corporate hats, or confused about which hat they are wearing.
Now there are clearly real and practical problems in the ERISA fiduciary world. The chorus that Justice Ginsberg references is clear testimony to that. Ask any participant and most top corporate officers and directors this question: "Who is the Named Fiduciary of your Profit Sharing or Pension Plan?" It is testimony to a serious problem with ERISA management that so few know the names of their plan's Named Fiduciary, even when they are responsible for naming the fiduciary, and when ERISA requires the disclosure of the name and address of every fiduciary.
When a plan's governance structure approaches the practical equivalent of having an unnamed named fiduciary responsible for the management and operation of the plan, that structure is likely to have a fiduciary governance structure in name only.
Serving two masters in a governance structure where the fiduciary is a top corporate officer or board member is especially difficult in certain situations. The use of strong fiduciary monitoring and evaluation procedures, independent fiduciaries, and other steps intended to ensure that decisions are made "solely" in the interest of plan participants, can be necessary steps for a plan sponsor's board of directors to consider. The governance structure of an ERISA plan will also need special attention when a plan sponsor's officers and directors are defendants in an ERISA litigation, in situations involving company stock, or when key portions of the plan's administrative operations have been delegated to the company itself.
The fundamental ERISA governance question for a board of directors is how to know when a plan's fiduciary governance has been prudently structured. When is it reasonable to expect that the corporate officers and directors serving as fiduciaries will internalize the full meaning of what it means to be wearing a fiduciary hat? The answer is to be found in the fundamental principles sewn into the ERISA tapestry. Furthermore, the answer to Justice Ginsberg and the chorus call for ERISA reform is not one that needs to wait for the creation of new rights, rules, regulations, and employee benefits laws. Instead, the answer lies in moving ahead with the vision of the ERISA fiduciary tapestry.
In my view, the call for ERISA "reform" is largely the result of boards of directors that have failed in their obligation to establish, monitor and evaluate the fiduciary governance structure. Of course, it is also the result of fiduciary failures in the operation and management of employee benefit plans; but a strong fiduciary governance structure makes those fiduciary breaches of duty less likely. And, of course, while the board of directors may not be the named fiduciary, the duty to establish, monitor and evaluate the fiduciary governance structure is the first and most fundamental of all fiduciary duties.
Those who appoint, monitor, and evaluate fiduciaries need to recognize that the mere naming of a fiduciary in accordance with ERISA is not sufficient. Corporate officers and directors who are named as fiduciaries need to know when they are acting as a fiduciary, and what it means to act solely in the exclusive interest of plan participants. The creation of a fiduciary governance structure can not be treated casually. When a judge puts on his or her robes in the formal setting of a courtroom, everyone - including the judge -- knows the judge's role. It is a mistake to assume that a corporate officer or director will properly understand his fiduciary role, even if he manages to recall that he needs to switch hats. Something more is needed, especially when dealing with situations in which significant corporate interests are involved. Exactly what is needed will depend on the specific situation.
However, every fiduciary governance structure must be designed with the goal of ensuring that its fiduciaries are focused on ERISA's governance vision. Establishing a fiduciary structure that is unlikely to result in actions that are solely in the interest of plan participants is a breach of fiduciary duty. But even fiduciary governance failures will move us toward the vision and promise of the ERISA tapestry as they contribute to the developing common law of ERISA. Each failure to follow the fiduciary governance thread of the ERISA tapestry is all the more likely to follow its equity enforcement thread.
1. Pomeroy, Equity Jurisprudence, §109 (5th ed. 1941).
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The opinions expressed here are those of the author and do not necessarily reflect the position of 401khelpcenter.com.
