ERISA s Definition of Fiduciary Omitting Discretion Might Come Back to Bite a Lot of TPAs

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1 ERISA s Definition of Fiduciary Omitting Discretion Might Come Back to Bite a Lot of TPAs Journal of Pension Benefits Winter 2007 Tess J. Ferrera Introduction Recent decisions have held that because the second clause of ERISA Section 3(21)(A)(i) omits the word discretion when a person "exercises any authority or control respecting management or disposition of [plan] assets," any exercise of control over plan assets is sufficient to render someone a fiduciary. Third-party administrators take heed. For those concerned about ERISA liability of thirdparty administrators, those concerns should be growing. Courts have been holding with increased frequency that professional service providers who otherwise are not ERISA fiduciaries are if they can sign checks from a plan account. [See "Fiduciary Status of Third-Party Health Claims Administrators," Journal of Pension Benefits, Winter 2006, vol. 13, no. 2.] In alarming unanimity, a relatively recent spate of decisions have sided with the position that, because the second clause of ERISA Section 3(21)(A)(i) omits the word discretion when a person "exercises any authority or control respecting management or disposition of [plan] assets," any exercise of control over plan assets is sufficient to render someone a fiduciary. This appears true irrespective of whether the service provider acts within a framework of plan policies and procedures or at the express direction of a plan fiduciary. Although in at least two of the recent opinions the court statements were arguably dicta, [see IT Corp. v. General American Life Ins. Co., 107 F.3d 1415, 1421 (9th Cir. 1997); General American Life Ins. Co., 107 F.3d 1415, 1421 (9th Cir. 1997); and Bd. of Trustees of Bricklayers and Allied Craftsmen Local 6 of New Jersey Welfare Fund v. Wettlin Associates, 237 F.3d 270, (3d Cir. 2001)] cases subsequent to those opinions have squarely held that discretion under the second clause of Section 3(21)(A)(i) is unnecessary when the act involves the disposition of plan assets. [See Coldesina v. The Estate of Simper, 407 F.3d 1126, 1133 (10th Cir. 2005); Chao, United States Department of Labor, v. Day, 436 F.3d 234 (D.C. Cir. 2006); and Briscoe v. Fine, 444 F.3d 478 (6th Cir. 2006).] It just doesn't seem right. Fiduciary Status Under ERISA Under ERISA, a person is a fiduciary "to the extent" he or she (i) exercises discretion over the management or administration of a plan; or exercises any authority or control over the management or disposition of plan assets, (ii) renders investment advise for a fee or other compensation, or (iii) has any discretionary authority or responsibility in the administration of a plan. [See 29 U.S.C. 1002(2 l)(a)(i)-(iii), ERISA 3(21)(A) (i)-3(21)(a)(iii).] This definition requires a functional

2 application irrespective of the actor's status or title under the ERISA plan's terms, and discretion is normally considered the "lynchpin" of assigning fiduciary status. [Curcio v. John Hancock Mut. Life Ins. Co., 33 F.3d 226, 233 (3d Cir. 1994); and see, e.g., Pohl v. Nat'l Benefits Consultants, Inc., 956 F.2d 126, 129 (7th Cir. 1991) ("At all events, ERISA makes the existence of discretion a sine qua non of fiduciary duty.")] So why are courts willing to dispense with discretion under the second clause of Section 3(21)(A)(i)? Without doubt, this position is defensible under the canons of statutory construction. In Briscoe, for example, the court stated that it would: presume under prevailing canons of statutory construction that Congress's omission of the word "discretionary" in the second part of the sentence was intentional, and that the threshold for acquiring fiduciary responsibilities is therefore lower for persons or entities responsible for the handling of plan assets than for those who manage the plan. [Briscoe, 444 F.3d at 491] In Day, the court rejected the defendant's argument that discretion is required in both the first and second clauses of Section 3(21)(A)(i) because the court stated such a reading "does violence to the statutory text." [Day, 436 F.3d at, 236 (D.C. Cir. 2006)] The court further explained that: [t]he plain language of that text connects the two classes of "fiduciaries" with the disjunctive "or" not the connective "and." Day, 436 F.3d at 236 (D.C. Cir 2006) citing Garcia v. United States, 469 U.S. 70 (1984) ("Canons of construction indicate that terms connected in the disjunctive in this manner be given separate meanings."); and 1A Norman J. Singer, Statutes And Statutory Construction at 181, 82 (6th ed. 2002) (courts presume that "or" is used in a statute disjunctively unless there is clear legislative intent to the contrary). None of the courts, however, quote legislative history or any other congressional pronouncement showing a clear congressional intent to dispense with discretion in the second clause of Section 3(21)(A)(i). Sloppy drafting is an everyday malfunction on the Hill. And, for just about every canon of statutory construction, there is a countervailing canon. For example, although it is true that "or" normally indicates that two clauses are disjunctively connected, another cannon of statutory construction provides that legislation should be read in a manner that does not render any other part of it a nullity. A reading of the second clause of Section 3(21)(A)(i) that requires no discretion would do just that to ERISA's bonding provisions. ERISA's bonding provision anticipates that not every person who handles plan assets will be a fiduciary, and Department of Labor regulations under the bonding provisions, albeit temporary regulations, but temporary since 1975, do too. [ERISA 412 and DOL Reg ] Reading "discretion" out of the second clause of ERISA Section 3(21)(A)(i) would render a nullity that portion of ERISA Section 412 providing that "[e]very fiduciary of an employee benefit plan and every Person who handles funds or other property of such a plan...shall be bonded...." With respect to nonfiduciaries that handle plan assets, ERISA Section 412 requires

3 that they be bonded and unambiguously anticipates that nonfiduciaries might have control over plan assets. [See DOL Reg (discussing "other persons covered" as "any persons performing such work for the plan, such as pension consultants and planners").] If all persons who handle plan assets, by definition, were fiduciaries under the second proviso of ERISA Section 3(21)(A)(i), then this distinction between "every fiduciary" and "every Person" in ERISA Section 412 would be meaningless. Therefore, as a matter of statutory construction, a reading of Section 3(21)(A)(i) that would render part of Section 412 a nullity should be rejected. This is especially true when, other reasonable interpretations that don't render another provision in the statute a nullity exist. [See "Fiduciary Status of Third-Party Health Claims Administrators," JPB Winter 2006, vol. 13, no. 2.] Moreover, as discussed at length in the earlier JPB article, the cases applying the second proviso of ERISA Section 3(21)(A)(i) typically involve an ultra vires act by a person handling the assets of a plan. [See "Fiduciary Status of Third-Party Health Claims Administrators," Journal of Pension Benefits, Winter 2006, vol. 13, no. 2] Most cases so holding typically involve an act that is taken outside the framework of policies and procedures established by a plan fiduciary which act allegedly caused a loss to the plan. [See, e.g., Coldesina, 407 F.3d 1126, 1133 (10th Cir. 2005) (investment manager stole $600,000 from the plan); Day, 436 F.3d 234 (D.C. Cir. 2006) (insurance agent issued fake insurance policies to 29 ERISA plans from which he collected hundreds of thousands of dollars for the purpose of purchasing legitimate insurance policies); and Briscoe v. Fine, 444 F.3d 478, 490 (6th Cir. 2006) (TPA's "unilateral disposition of funds held in an account over which it exerted control makes it a fiduciary to the extent that it exercised control upon the termination of its relationship with the company.")] In situations in which there has been no evidence of an ultra vires act or wrongdoing, courts have been more reluctant to find fiduciary status even where the person had undisputed control over plan assets. The best example is the Eleventh Circuit's opinion in Useden v. Acker. [947 F. 2d 1563, (11th Cir. 1991)] In Useden, the court held that "[a]n entity which assumes discretionary authority or control over plan assets will not be considered a fiduciary if that discretion is sufficiently limited by a preexisting framework of policies, practices, and procedures." [Id., at 1575; see also Tower Loan of Miss. v. Hospital Benefits, Inc., 200 F. Supp. 2d 642, (S.D. Miss. 2001) (rejecting notion that checkwriting is sufficient to make someone a fiduciary).]perhaps the better conclusion in situations in which a person has nondiscretionary check signing authority over an account containing plan assets, is that the person can become a fiduciary if the person acts outside the direction of a fiduciary or participates in a knowingly wrongful act that he or she had the power to stop if the check had not been written and signed by the nonfiduciary in effect, if the person's action was ultra vires and arguably described as an exercise of discretion over the assets of the plan. Fiduciary Liability Under ERISA The gravity of a court's willingness to deem a person a fiduciary under the second proviso of ERISA Section 3(21)(A)(i) where the person has exercised discretion may be most acutely demonstrated in the context of ERISA's co-fiduciary liability provisions, which provide:

4 [i]n addition to any liability which he may have under any other provision of this part, a fiduciary with respect to a plan shall be liable for a breach of another fiduciary with respect to the same plan in the following circumstances: (1) if he participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach; (2) if, by his failure to comply with section 404(a)(l) in the administration of his specific responsibilities which give rise to his status as a fiduciary, he has enabled such other fiduciary to commit a breach; or (3) if he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach. ERISA Section 405(a)(l) (3) These three provisions impose different standards of potential co-fiduciary liability. Common to all three, however, is that "another fiduciary must have committed a breach of fiduciary duty." [In re Sprint Corp. ERISA Litigation, 2004 WL *4 (D. Kan. Sept. 24, 2004)] Also common to all three is that the person accused of co-fiduciary liability must also serve in a fiduciary capacity to the plan. As the Sprint court explained, under ERISA Section 405(a)(l), "a co-fiduciary is liable for the other fiduciary's breach of fiduciary duty when: (1) the co-fiduciary had actual knowledge of the other fiduciary's breach; (2) the cofiduciary knowingly participated in the breach or undertook to conceal it; and (3) damages resulted therefrom." [In re Sprint Corp. ERISA Litigation, 2004 WL *4 (D. Kan., Sept. 24, 2004)] By contrast, under ERISA Section 405(a)(2), a co-fiduciary is liable for the other fiduciary's breach when the co-fiduciary fails to comply with his or her duties of care under ERISA and that failure enables another fiduciary to commit a fiduciary breach. This provision has been described as "the broadest type of cofiduciary liability without any requirement of knowledge about what the [other] fiduciary is doing." [In re Sprint Corp. ERISA Litigation, 2004 WL *4 (D. Kan., Sept. 24, 2004) quoting In re Enron Corp. Securities, Derivative & ERISA Litig., 284 F. Supp. 2d 511, (S.D. Tex. 2003)] Finally, liability under ERISA Section 405(a)(3) requires a finding that: 1. A co-fiduciary had actual knowledge of the other fiduciary's breach; 2. A co-fiduciary failed to take any remedial steps; and 3. Damages resulted from the breach. [In re Sprint Corp. ERISA Litigation, 2004 WL *4 (D. Kan., Sept. 24, 2004)] The following hypothetical may help illustrate the potential dangers of deeming persons that have no discretion fiduciaries: A TPA servicing a multiple employer welfare arrangement (MEWA) has check signing authority over an account containing plan assets. Under its contract with the MEWA, the TPA collects contributions, processes and pays claims, but it does not decide final appeals. At the direction of the plan's fiduciaries, the TPA also

5 pays the invoices of the plan's other service providers. The TPA, however, has no underwriting authority and it does not set the contribution rates for the health plan. The facts support a finding that the TPA actually is paying claims properly under the plan and that it is properly paying the plan's other administrative expenses. Further assume that the TPA knows the plan is running into difficulty paying claims and eventually the MEWA becomes insolvent, allegedly due to poor rate-setting and underwriting. The US Department of Labor files an action against the MEWA managers alleging imprudence and self-dealing. It names the TPA as a defendant. The complaint alleges that the TPA is a fiduciary because it had check signing authority over the MEWA's account. The DOL further alleges that the TPA is co-extensively liable with the MEWA fiduciaries for all losses suffered by the plan. If a court decides that the TPA is a fiduciary because it signed checks, albeit at the direction of a fiduciary, should the TPA be liable co-extensively with the MEWA fiduciaries for the alleged imprudence of those fiduciaries, where there is no evidence that the TPA imprudently discharged its contractual obligations? Assume the court rejects the notion that the TPA is a fiduciary merely because it signed checks. The court, however, concludes that in four instances, over a ten-year period, the TPA wrote checks to the MEWA sponsor, at the direction of the MEWA fiduciaries, that were for the payment of improper expenses. Should writing checks, albeit improper, but nonetheless at the direction of a fiduciary, make the TPA a fiduciary? And, if so, should the TPA be deemed co-extensively liable with the MEWA fiduciaries for all losses to the plan caused by the other fiduciaries' alleged underwriting imprudence and not just the alleged losses resulting from the four checks the court concluded were improper? Essentially, the question posited is whether it is good public policy to deem a TPA a fiduciary where the TPA has no discretion, but writes and signs checks out of a plan account to pay legitimate plan expenses within a framework of policies and procedures set by the plan fiduciaries, if that finding potentially exposes the TPA, under ERISA Section 405, to liability for all losses to the plan, which losses were caused by other fiduciaries that the TPA did not control. Just about now, ERISA-savvy readers likely are raising the "to the extent" language in ERISA's definition of a fiduciary which generally limits fiduciary liability only to those acts over which a fiduciary controls. It is well established that a person's fiduciary status is not an all or nothing proposition and that a person may be a fiduciary for one purpose, but not for another. [See ERISA 408(c)(3); see, e.g., Sonoco Prods Co. v. Physicians Health Plan, Inc., 338 F.3d 366, 373 (4th Cir 2003) (a plan sponsor is entitled to wear different hats; it may perform some functions as a fiduciary and others as a nonfiduciary); Martinez v. Schlumberger, Ltd, 338 F.3d 407, 412 (5th Cir 2003) (ERISA allows employer to act as plan administrator); Campbell v. BankBoston, NA, 327 F.3d 1, 6-7 (1st Cir. 2003) (plan administrator did not act in a fiduciary capacity when she amended plan)] Thus a person is a fiduciary "to the extent" that he or she performs any of the acts described in ERISA's functional definition of a fiduciary and serves to limit potential liability.

6 ERISA's limitation language of who is a fiduciary should serve to limit liability under ERISA Section 405 as it seems wrong to interpret potential co-fiduciary liability under ERISA Section 405 broader than fiduciary liability outside the Section 405 context. But these are open questions. Arguments can be made both for and against a very expansive application of fiduciary status and attendant liability for TPAs. Arguing in favor of the liability may ultimately place plans in greater jeopardy by encouraging TPAs to resign at the first sign of trouble for fear of their potential exposure. However, resigning when a plan is experiencing difficulties also may expose a TPA to unexpected other allegations and potential liability. Moreover, although not to limit the factual application of the questions raised herein, it seems patently unfair to hold a TPA coextensively liable with plan trustees or other fiduciaries if the TPA has no power to increase contributions, lower benefits, or otherwise take action that could modify the plan's course toward insolvency as one scenario in which TPAs may routinely find themselves. Conclusion Courts are trending toward holding that discretion is not necessary for a finding of fiduciary status under the second clause of ERISA Section 3(21)(A)(i). TPAs with check signing authority over plan accounts are well advised to review their practices and take additional steps to reduce their potential exposure. This article appeared in the Winter 2007 issue of the Journal of Pension Benefits and is reproduced with permission from the Journal of Pension Benefits Schiff Hardin LLP This publication has been prepared for the general information of clients and friends of the firm. It is not intended to provide legal advice with respect to any specific matter. Under rules applicable to the professional conduct of attorneys in various jurisdictions, it may be considered attorney advertising material. Prior results do not guarantee a similar outcome. For more information visit our Web site at