United States: DOL Guidance: ERISA Fiduciary Responsibility To Monitor And Collect Delinquent Contributions

Employers maintaining benefit plans that are subject to ERISA's trust requirement and plan fiduciaries should properly assign authority over plan assets, or they may be subject to fiduciary responsibility (and liability) for losses sustained by the plan.

On February 1, 2008, the U.S. Department of Labor (DOL) released Field Assistance Bulletin No. 2008-01 (FAB), which addresses the fiduciary responsibilities of named fiduciaries and trustees of ERISA-covered plans for the collection of delinquent employer and employee contributions. The DOL's Employee Benefits Security Administration developed the FAB in response to its pension investigation, which revealed arrangements purporting to relieve financial institutions, serving as plan trustees, of any responsibility to monitor and collect delinquent contributions and arrangements that were either silent or ambiguous on the matter.

Contribution Delinquency

Employer contributions are delinquent when they are due and owing to the plan under the documents and instruments governing the plan (or within a reasonable time after the legal obligation to make the contribution arises), but have not been transmitted to the plan in a timely manner. The DOL's position is that, although employer contributions are plan assets only when the contribution is actually made, a plan's claim against the employer when it fails to make the required contribution is also by itself a plan asset. Under existing DOL regulations, participant contributions that are deducted from an employee's wages or paid to the employer are delinquent if they are held by the employer beyond the earliest date that such withheld or paid amounts can be reasonably segregated from the employer's general assets. In the case of a pension plan, such as a 401(k) plan, this date can be no later than the 15th business day of the month following the month in which the participant contributions were withheld from the employee's paycheck or paid to the employer. (On February 29, 2008, the DOL issued proposed regulations that would institute a safe harbor contribution period of seven business days for "small" plans (those that cover fewer than 100 participants). This proposal may generate further changes to the timing of the contributions to plans of all sizes, depending on the comments submitted to the DOL on this proposal.)

Duties of a Trustee

Under common law, one of a trustee's fundamental duties of a trustee is to preserve and maintain all trust assets. Thus, a trustee retains the duty to enforce valid claims held by the trust. In addition to common law, ERISA's statutory framework imposes such a duty on a trustee of an ERISA-covered plan.

ERISA Requirements

Chief among ERISA's fiduciary standards is the requirement that a plan fiduciary discharge its duties prudently and solely in the interests of the plan participants and beneficiaries. The steps necessary to discharge the fiduciary duty in collecting delinquent contributions will hinge on the facts of each case. Nevertheless, a fiduciary faced with the situation of pursuing a claim for unpaid contributions should weigh the value of the plan assets involved, the likelihood of a successful recovery and the expenses to be incurred in any recovery effort. A fiduciary may also consider the employer's solvency in deciding whether to expend plan assets pursuing a claim.

In addition, ERISA requires both that a plan be established pursuant to a written document that identifies one or more "named fiduciaries" that will control and manage the operation and administration of the plan, and that all plan assets generally be held in trust by one or more designated or appointed trustees. Except in the case of a directed trustee or the delegation to one or more investment managers, the plan trustee retains exclusive authority to manage and control the assets of the plan upon its acceptance of such designation or appointment.

Accordingly, the FAB reaffirms that a plan trustee will, by definition, "always be a 'fiduciary' under ERISA as a result of its authority or control over plan assets." However, if plan assets are held by two or more trustees, ERISA states that such trustees are deemed to jointly manage and control the plan assets, except to the extent the trust agreement allocates responsibilities among trustees. In such case, a trustee will not be liable for the failure of another trustee to perform the responsibilities that are so allocated to the other trustee. Similarly, when plan assets are held in more than one trust, a trustee is only responsible for the trust for which it serves as trustee.

Based on the foregoing ERISA requirements, the FAB holds that the authority over a plan's assets held in trust, including the duty to collect delinquent contributions, must be assigned by a named or functional fiduciary that has authority to appoint the plan's trustee(s) to (1) a plan trustee with discretionary authority over the assets, (2) a directed trustee subject to the proper and lawful directions of a named fiduciary, or (3) an investment manager. The FAB warns that if the fiduciary fails to make such an appointment, that fiduciary may be held liable for plan losses resulting from a failure to collect contributions. These situations are evaluated based on all the facts and circumstances, including, but not limited to, the terms of the plan, trust and other governing documents; the trustee's conduct; and the requirements of ERISA.

Even if a trustee is not responsible for monitoring and collecting contributions under the terms of the trust agreement, ERISA obligates that trustee (including a directed trustee) to take appropriate steps to remedy a situation in which the trustee knows that no party has assumed responsibility for collecting and monitoring contributions, and that delinquent contributions are going uncollected. Such corrective efforts may include (1) advising the named fiduciary or DOL of the breach, (2) reporting the breach to other plan fiduciaries, (3) taking actions to enforce the contribution obligation on behalf of the plan, (4) seeking an amendment of the plan and trust documents, or (5) seeking a court order mandating a proper allocation of the fiduciary responsibility over contributions.

What You Should Do

Employers maintaining benefit plans that are subject to ERISA's trust requirement and plan fiduciaries of such plans, such as specific company officers or investment committees, should carefully examine the plan, trust and other governing documents to ensure that the authority over plan assets, including the collection and monitoring of delinquent contributions, has been properly assigned. Failure to properly assign such authority may unknowingly result in fiduciary responsibility (and liability) for losses sustained by the plan arising from the failure to collect delinquent contributions.

Plan sponsors should be expecting changes to their agreements with directed trustees and service providers that are designed to comply with DOL standards as reflected in the FAB. In particular, many directed trust agreements might include provisions absolving the trustee of any responsibility to pursue delinquent contributions. In light of the DOL's standards, these providers may be seeking modifications of those agreements to clarify what their responsibilities are in this regard.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.