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Monitoring ERISA Investment Fiduciaries

Fiduciaries of employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) that appoint investment managers (“Appointing Fiduciaries”) will be interested in the opinion of the U.S. District Court for the Western District of Pennsylvania in Scalia v. WPN Corporation, et al (“WPN”) regarding their duty to monitor investment fiduciaries.  Given the potential risk related to a breach this fiduciary duty, the WPN opinion is likely to be an important one for Appointing Fiduciaries.

In WPN, the Department of Labor alleged that the Retirement Committee for two plans sponsored by Wheeling Corrugating Company and its affiliates (the “Retirement Committee”) breached its fiduciary duty by failing to monitor the investment fiduciary appointed to manage plan assets (the “Investment Manager”) and failing to remove the Investment Manager when it did not follow instructions from the Retirement Committee to diversify plan investments.  The Retirement Committee took the position that it fulfilled its duty to monitor by implementing a routine monitoring procedure, adhering to it, reviewing reports from an investment adviser, identifying the actions of the Investment Manager that were not consistent with Retirement Committee directions, and taking corrective action with the assistance of counsel.  The court agreed with the Retirement Committee and granted its motion for summary judgment.

In its opinion, the WPN court provided the following guidance for assessing the extent to which an Appointing Fiduciary has a duty to monitor and, if so, for determining whether the Appointing Fiduciary has fulfilled that duty:

  • No Liability If No Notice. The obligation of an Appointing Fiduciary to take action is not triggered until the Appointing Fiduciary has notice of a possible breach on account of a particular action by, or outcome due to, an investment fiduciary.  In determining whether an Appointing Fiduciary has such notice, the focus is on the extent to which the Appointing Fiduciary, at a given point in time, reasonably could have predicted the action or outcome that followed.  An Appointing Fiduciary is not required to know of an action or outcome before it occurs.

With respect to the Retirement Committee, the court noted that the DOL admitted that a breach by the Investment Manager occurred before monitoring by the Retirement Committee could begin.

  • Quarterly Monitoring with Corrective Action. After implementing proper monitoring procedures, an Appointing Fiduciary has a duty to review and evaluate the information reported through such procedures and take corrective action as required.  The DOL has stated that an Appointing Fiduciary will satisfy this duty if the Appointing Fiduciary adopts and adheres to routine monitoring procedures sufficient to alert the Appointing Fiduciary to deficiencies in performance that could require corrective action.  In its discussion of this duty, the WPN court indicated that at least one court has found quarterly monitoring to be sufficient and noted that the Retirement Committee received quarterly reports from its investment adviser on the plans’ investments.

With respect to the Retirement Committee, the WPN court explained that immediately after learning that the Investment Manager had not diversified plan investments, the Retirement Committee, together with its ERISA attorney, began to develop a strategy to resolve the situation while retaining as much of the value of the assets as possible.  The assets were ultimately sold and the Investment Manager terminated.

  • No Duty to Review All Decisions of an Investment Fiduciary. An Appointing Fiduciary’s duty to monitor is not a duty to review every decision made by an investment fiduciary. The courts have maintained this position even during a financial crisis.

Take-Aways For Appointing Fiduciaries

The guidance from the WPN court is essentially a roadmap that can assist an Appointing Fiduciary in satisfying its duty to monitor the investment fiduciaries that it has appointed.  The WPN court found that the Retirement Committee generally followed this roadmap because, even though the Retirement Committee did not have sufficient notice to prevent the Investment Manager’s failure to diversity plan assets, the Retirement Committee implemented action as soon as practicable after evaluating the available information regarding the actions of the Investment Manager.  Therefore, an Appointing Fiduciary that follows this roadmap should be able to mitigate the risk of failing to fulfill its duty to monitor.

©2020 Epstein Becker & Green, P.C. All rights reserved.National Law Review, Volume IX, Number 339

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About this Author

Sharon Lippet, Epstein Becker Law Firm, Employee Benefits Attorney
Member

SHARON L. LIPPETT is a Member of the Firm in the Employee Benefits practice, in the New York office of Epstein Becker Green. She has substantial experience in matters relating to tax-qualified and nonqualified retirement plans, welfare plans, cafeteria plans, fiduciary matters, and plan asset entities. Her practice focuses on the design, establishment, communication, and legal compliance of compensation and benefit arrangements, including non-qualified deferred compensation plans and qualified retirement plans.

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