Understanding Your Fiduciary Duty Under ERISA

Apr 10, 2024

When it comes to managing employee benefit plans, organizational leaders shoulder significant responsibility. Central to this responsibility is understanding and fulfilling the fiduciary duties under the Employee Retirement Income Security Act (ERISA). 

Below, we’ll cover the critical nature of fiduciary responsibility, its legal foundations and the implications organizations face when not properly navigated — all to ensure you’re equipped to untangle the web that is managing your fiduciary duty under ERISA.

ERISA and the Foundation of Fiduciary Duty

ERISA, enacted in 1974, sets rules for retirement and health plans that companies offer to their employees. These rules are meant to protect the people who are part of these plans.

ERISA outlines that plans must give participants important information about how the plan works and how it’s funded. It also establishes that plans must meet certain standards for who can participate, how long they have to work before they receive benefits, how benefits are earned over time and how the plan is funded. 

Additionally, ERISA gives fiduciary responsibilities to those who manage and control the money in these plans. It requires plans to have a process for handling complaints and appeals from participants who want to get benefits. 

If participants have problems with their benefits or if fiduciaries don’t do their job properly, ERISA allows them to sue. And if a certain type of plan is ended, ERISA ensures that some benefits are still paid, through a government agency called the Pension Benefit Guaranty Corporation (PBGC).

Ultimately, the foundation of fiduciary duty under ERISA lies at its core — requiring those managing employee benefit plans to act prudently, solely in the interest of plan participants and with the exclusive purpose of providing benefits and defraying reasonable expenses.

Learning From Fiduciary Failures

The consequences of breaching fiduciary duties can be severe, both legally and reputationally. Notable cases, such as the recent Johnson & Johnson case, serve as cautionary tales, illustrating the detrimental effects of fiduciary breaches on employees, shareholders and corporate reputation. 

Fiduciary failures, such as the case noted above, shed light on significant concerns for fiduciaries, including:

  • Heightened Scrutiny – Fiduciary failures often increase the examination of self-funded health plans, focusing on their dealings with pharmacy benefit managers and the strategies for negotiating drug prices. 
  • Financial Risks – If found in breach of ERISA fiduciary duties, the financial repercussions could be substantial. Past verdicts might serve as a wake-up call for other employers about the financial dangers of failing to comply with ERISA’s mandates.
  • Reputational Concerns – Beyond the financial implications, organizations can be at risk of reputational damage. Such a scenario can have a domino effect on other employers, who may proactively ensure ERISA compliance to sidestep adverse publicity and its potential impact on employee confidence and morale.

Learning from past fiduciary failures is essential for leadership to avoid similar pitfalls.

Navigating ERISA Compliance

Maintaining ERISA compliance requires a proactive and diligent approach. Fiduciaries must prioritize documentation, due diligence and best practices in vendor selection. By establishing robust processes and protocols, organizations can mitigate legal risks, safeguard employee benefits and uphold their fiduciary responsibilities.

Primary Responsibilities of Fiduciaries under ERISA

  • Acting in Participants’ Interests: Fiduciaries must run the plan solely for the benefit of participants and beneficiaries.
  • Prudent Actions: Fiduciaries must act prudently, considering the risks and benefits, and diversify plan investments to minimize the chance of significant losses.
  • Compliance with Plan Terms: Fiduciaries must adhere to the terms of plan documents as long as they align with ERISA regulations.
  • Conflict Avoidance: Fiduciaries must steer clear of conflicts of interest, avoiding transactions that benefit related parties such as other fiduciaries, service providers or the plan sponsor.

Liability for Breach of Fiduciary Duty

  • Personal Liability: Fiduciaries who fail to adhere to these principles may be personally liable to compensate for any losses incurred by the plan.
  • Restitution: Organizations may be required to restore any profits gained through improper use of plan assets.
  • Legal Action: Courts have the authority to take appropriate action against fiduciaries, including their removal, for breaching their duties under ERISA.

Understanding Your Fiduciary Duty

Fulfilling fiduciary duties under ERISA is not merely a legal obligation but a moral imperative for designated employee benefit plan fiduciaries. By understanding the legal foundations of fiduciary duty under ERISA and prioritizing compliance, organizations can effectively steward their resources, mitigate legal risks and fulfill their commitment to providing employees with secure and reliable benefits. 

Taking a proactive approach to fiduciary responsibility, supported by ongoing education and expert consultation, is essential for navigating the complexities of ERISA and ensuring the well-being of both employees and the organization as a whole.

For additional support navigating ERISA compliance, connect with the Totem Team for more information.

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