VideoWhen Congress passed the Employee Retirement Income Security Act (ERISA) in 1974, it provided plan sponsors with some relief from liability as a fiduciary in defined- contribution plans. The idea behind the statutory safe harbor in the act's 404(c) provision is "that to the extent the participants have the ability to control investments in their investment accounts, the fiduciary will not be liable for those decisions," explains Robert Doyle, director of the office of regulations at the Department of Labor.
Doyle terms the regulations that the department issued in 1992 under rule 404 (c) "essentially a defense to liability" in the face of lawsuits charging breach of fiduciary duty. (See box, page 64, for compliance requirements.)
But most plan sponsors are unconvinced that 404 (c) offers much protection. "I don't think we know, because we haven't had a bear market yet," says Myra Drucker, assistant treasurer and chief investment officer at Xerox Corp., in Stamford, Connecticut. "Come the bear market, we'll find out how much protection it supplies," she adds, noting that's when the lawsuits will be filed and the courts will establish case law for this provision. So far, there is virtually no case law on 404(c) regulations.
So Drucker isn't taking any chances. Xerox has done everything it believes is necessary to comply with 404(c) regulations. It notifies participants that it is in compliance, has put in six investment options with different reward and risk characteristics, and is considering adding more later this year. Xerox also notifies participants that they are responsible for their investment decisions, and provides regular information on the historic and current performance of the investment options.
No Precedent
Another big sponsor, Exxon Corp., in Irving, Texas, has four options, is considering adding another, and provides daily valuation and frequent opportunities to switch among them.
Others are going even further. A 1997 survey by HayGroup, an international compensation consulting firm based in Philadelphia, found that 90 percent of 460 sponsors had four or more investment options. And the Labor Department's Doyle says most plans now have between 9 and 12, and they offer participants the opportunity to change investments daily. These design criteria are much more than the minimum required.
One might think sponsors' anxiety over fiduciary liability would have been eased by a recent court decision involving Unisys Corp, a computer company based in Blue Bell, Pennsylvania. The November 1997 federal-court decision involving Unisys held that 404(c) offers broader protections than those described by the regulations. But most plan sponsors don't read a lot into that.
One reason is that the case is being appealed. But the main reason is that the case was based on claims that originated prior to issuance of 404(c) regulations. In the future, courts are expected to take the regulations into account in their decisions, and the regulations require more of plan sponsors than did the standard to which Unisys was held. While the court concluded that the safe harbor of 404(c) could have protected Unisys even if the company had not been prudent in selecting three guaranteed investment contracts from Executive Life in 1987 and 1988 to put into its investment funds, the decision relied entirely on "a statutory approach explicitly rejecting reliance on the regulations," notes Brian T. Ortelere of Pepper Hamilton LLP, in Philadelphia, who represents Unisys.
What's more, the Department of Labor has since filed a brief in support of the plaintiff's appeal, which was filed in June. Neither the attorney for the plaintiffs in the Unisys case nor the Department of Labor would comment.
Clearly, however, the department's view of plan-sponsor liability is quite different from the court's. Even if a plan sponsor complies with all the provisions of the 404(c) regulations, the sponsor retains liability for choosing and monitoring the investment options in the plan, says Doyle. "The plan sponsor must be prudent in making those choices," he says.
Paper Trail
ERISA attorneys who advise plan sponsors generally encourage the clients to heed the Department of Labor's interpretation of the 404 (c) safe harbor, expecting courts to weigh the department's views in its determination of future lawsuits. In general, employers "have to be able to show they acted prudently" in selecting and retaining either a type of investment option or particular fund, says Donald J. Myers, partner and head of benefits practice in the Washington, D.C., office of Reed Smith Shaw & McClay.
In any case, Myers says it is critical that a sponsor establish procedures and follow them, because this will allow the sponsor to document how it monitors investment options and money managers. He recommends beginning with an investment policy for the plan that explains the purpose of its particular set of options.
Beyond the minimums spelled out by the regulations, there is no correct number of options or types of options, Myers says. Whatever decision is finally made, "the employer can protect itself by carrying out every decision in a prudent manner," and documenting how that was done, Myers says. "The employer must be able to demonstrate he behaved in a prudent manner," he explains.
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