I received this great piece from a colleague of mine, Joe Reese, who kindly offered to post it on our blog. Thanks Joe - Jason G.
Recently,
we were competing for a law firm and were told by the Plan Sponsor that the
insurance company service providers we were competing with “can assume being
named the Plan Trustee.” We are a discretionary plan trustee – it was
clear the insurance company service providers were offering a directed trustee
solution. While a discretionary trustee and a directed trustee are both trustees
and both fiduciaries, they are not one in the same.
After
days of back and forth, reviewing documents, etc. the law firm requested 3rd
party information highlighting the difference between a discretionary trustee
and directed trustee. The following was our response.
First,
some context…
ERISA
Section 402(a) provides that a written plan document must include one or more
‘‘named fiduciaries’’ who control and manage the plan’s operation and
ad-ministration. ERISA Section 403(a) states that plan assets generally are
held in trust, managed by trustees either named in the trust instrument or
appointed by the plan’s named fiduciary. Trustees typically have authority to
manage and control plan assets unless the plan expressly provides that the
trustees are subject to the direction of the named fiduciary or delegates such
authority to an investment manager.
Then
in the DOL’s own words…
DOL
Field Assistance Bulletin 2004-3: Fiduciary Responsibilities of Directed
Trustees
Here
are a couple key parts of the above Field Assistance Bulletin:
- The duties of a directed trustee under section 403(a)(1) are therefore significantly narrower than the duties generally ascribed to a discretionary trustee under common law trust principles.
- The named fiduciary has primary responsibility for determining the prudence of a particular transaction, whether the transaction involves buying, selling or holding particular assets. Accordingly, as the courts and the Department have long recognized, the scope of a directed trustee’s responsibility is significantly limited. A directed trustee does not, in the view of the Department, have an independent obligation to determine the prudence of every transaction. The directed trustee does not have an obligation to duplicate or second-guess the work of the plan fiduciaries that have discretionary authority over the management of plan assets and does not have a direct obligation to determine the prudence of a transaction. See In re WorldCom ERISA Litig., 263 F. Supp. 2d at 761; Herman v. NationsBank Trust Co., 126 F.3d at 1361-62, 1371 (directed trustee does not have a direct obligation of prudence under ERISA section 404; its obligation is simply “to make sure” the “directions were proper, in accordance with the terms of the plan, and not contrary to ERISA”).
And
finally, Case Law…
Federal
courts have typically held that a retirement plan’s directed trustee can’t be
held liable if it followed the investment directions of the plan’s named
fiduciary. Below is a summary of cases dealing with directed trustee liability.
Renfro
v. Unisys Corp., 671 F. 3d 314 - Court of Appeals, 3rd Circuit 2011
“Fidelity's
limited role as a directed trustee, delineated in the trust agreement, does not
encompass the activities alleged as a breach of fiduciary duty—the selection
and maintenance of the mix and range of investment options included in the
plan.”
“As
we have explained, a directed trustee is essentially "immune from
judicial inquiry" because it lacks discretion, taking instructions
from the plan that it is required to follow.”
Fidelity
maintained that it was not a fiduciary with respect to the conduct constituting
the alleged fiduciary breach. The trial court granted Fidelity's motion to
dismiss, ruling that Fidelity and its related entities were not fiduciaries
with respect to the challenged conduct because they did not exercise control
over the selection and inclusion of investment options in the plan.
Tussey
v. ABB, Inc., Case 2:06-CV-04305, 2010 Document 103
“By
the plain language of the Trust Agreement, Fidelity Trust has no responsibility
for reviewing the merits of fund choices made by the Pension Review
Committee.
Thus,
Fidelity Trust had no responsibility to prevent the addition of the Fidelity
Freedom Funds to the Plan’s investment line-up. For these reasons, the
Court finds that Fidelity Trust cannot be held liable for ABB’s breaches under
ERISA Section 405(a)(2).”
Fidelity’s
reaction to the Tussey v. ABB court’s decision regarding Fidelity not being
responsible as a directed trustee: “We are pleased with the decision
today by the court of appeals,” Vincent Loporchio, a Fidelity spokesman wrote
in an email. “Fidelity’s actions were in all respects consistent with our
fiduciary duties to our clients and all legal requirements. With this decision
on appeal, Fidelity has prevailed on all claims asserted against it in
court.”
In
re Cardinal Health Inc. ERISA Litigation, S.D. Ohio, No. C2-04-643, 3/31/06
The
US District Court for the Southern District of Ohio dismissed a claim against
Putnam Fiduciary Trust Co. as directed trustee of Cardinal Health employees'
retirement plan in a case involving company stock investments. The court found that Putnam was
a directed trustee with limited fiduciary duties. The judge also refused
to dismiss the employees' claim that some of the Cardinal Health defendants
breached their ERISA fiduciary duties by failing to monitor those they had
appointed to act as plan fiduciaries, and said Cardinal Health may be liable
under the doctrine of respondeat superior for its board of directors' failure
to monitor those they appointed to act as plan fiduciaries.
Donovan
v. Cunningham14 (S.D. Texas 1982)
This
early case briefly discussed the ‘‘limited role’’ of the directed trustee. The court noted that a directed
trustee couldn’t be liable for breach of fiduciary duty where its activities
‘‘at all times remained within the limited role of a directed trustee.’’
Maniace
v. Commerce Bank of Kansas City18 (8th Cir. 1994)
The
Eighth Circuit ruled that a bank serving as directed trustee of an ESOP didn’t
violate its fiduciary duties in allowing the plan to continue to hold large
amounts of employer stock despite the stock’s declining value. The court found
that, as a directed trustee, the bank wasn’t an ERISA fiduciary with respect to
employer stock held by the ESOP because it lacked discretion over plan assets.
According to the court, ‘‘the
obligations of a directed trustee are something less than that owed by typical
fiduciaries.’’
Grindstaff
v. Green20 (6th Cir. 1998)
The
Sixth Circuit ruled that a
directed trustee isn’t a fiduciary to the extent it doesn’t control the
management or disposition of plan assets. The court rejected ESOP
participants’ claim that the ESOP’s directed trustee had a duty to investigate
the merits of any directives given to it by the plan’s named fiduciary. The
court noted that the trustee had no discretion pertaining to voting the ESOP
stock and could only act at the direction of the named fiduciary.
In
re McKesson HBOC Inc. ERISA Litigation21 (N.D. Cal. 2002)
A
California federal district court dismissed ESOP participants’ claim that the
plan’s directed trustee breached its ERISA fiduciary duties by allowing plan
fiduciaries to continue to invest in employer stock when it allegedly knew that
such an investment was imprudent. The court found that as a directed trustee, the trustee was obligated
to follow the investment instructions given by the named fiduciaries and thus
couldn’t be held liable for any losses that resulted from performance of its
duty to follow those instructions. The court noted in a footnote,
however, that if the participants could demonstrate that the trustee knew that
the investment directives violated ERISA, then the trustee wouldn’t be relieved
of ERISA liability by following such imprudent directives.
Lalonde
v. Textron Inc.22 (D. R.I. 2003)
In
this case, the district court dismissed ESOP participants’ claim that the
plan’s directed trustee breached its fiduciary duties by not rejecting the named
fiduciary’s directive to invest in the plan sponsor’s stock. The court found
that the directed trustee
had no discretionary authority, and hence no fiduciary status. The First
Circuit subsequently upheld the district court’s decision after concluding
that, even if it were to assume that the trustee wasn’t a true directed
trustee, there was nothing in the participants’ complaint that would permit an
inference that the trustee abused any discretion it might have had.
Yes,
discretionary trustees and directed trustees are both fiduciaries, and
trustees…but the role they play are not the same. A Plan Sponsor who confuses
the two does so at his or her own peril.
