Most people think of the Enron lawsuit as a company stock case. While that is true, it is much more. It awakened?or should have awakened?plan sponsors to the need for corporate governance for ERISA plans, much as Sarbanes-Oxley has forced publicly traded companies to focus on corporate governance and risk management.

The court found that the members of Enron's Board of Directors, specifically members of the Compensation Committee, were ERISA fiduciaries. The Enron plan document said that the company appointed the members of the Plan Committee. The judge concluded that, because of the nature of corporations, the board (or its Compensation Committee) was the agent for the appointment and monitoring of the Plan Committee. The judge then determined that, under ERISA, the members of the board’s Compensation Committee were fiduciaries because they appointed the members of the Plan Committee. That is, a person who appoints a fiduciary is a fiduciary. As a result, the members of the Compensation Committee had an ongoing duty to monitor the performance of the Plan Committee to ensure that it was performing its duties.

Because of that decision, many plan sponsors (and particularly large plan sponsors) have been:

* reviewing their plan documents to understand better the provisions concerning the selection and monitoring of committee members, trustees, and other fiduciaries (and, in some cases, amending the plans to change the provisions);

* educating the directors on their fiduciary responsibilities, through memos or briefings, or both;

* improving their risk management procedures, including requiring the Plan Committee to provide an annual report to the board to help with the monitoring responsibility; and

* developing formal written statements on the responsibilities of the board and the Plan Committee.

In the Enron case, the outside directors and committee members have settled with the attorneys for the participants. The settlement cost almost $100 million, most of which was paid by the fiduciary insurer. However, the individuals had to pay approximately $1.5 million from their own pockets.

While it is well-known that ERISA imposes personal liability on fiduciaries, the meaning of those words becomes much clearer when such a high-profile case drives them home.

One obvious conclusion is that committees and directors should be covered by fiduciary breach insurance, at a level appropriate for the size of their plan and the nature of the investments. Another is that they should be earnest about fulfilling their fiduciary duties, most significantly in the context of this discussion, the duty of loyalty to the participants and the duty to act for the exclusive purpose of providing retirement benefits.

First and foremost, ERISA instructs fiduciaries to act for the exclusive purpose of providing retirement benefits to participants and beneficiaries. Every decision must be evaluated in the context of the question, "Does this provide better benefits for participants?"

Second, fiduciaries must be committed to the participants. Even if the fiduciaries are corporate officers or managers, they cannot favor their employer over the employees when making fiduciary decisions.

Incidentally, that duty of loyalty is a particularly difficult burden in cases involving company stock, because there may be an inherent conflict of interest between the roles of corporate officers and the roles of fiduciaries, such as plan committee members. Where a fiduciary cannot, for any reason, act with the duty of loyalty to the participants, the fiduciary should remove himself from the decision-making process, and an independent fiduciary should be appointed to make the decision.

The third rule, the prudent man rule, is a standard of care. That is, when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard.

While the Enron decision discussed these issues in the context of company stock, the rules apply to all ERISA retirement plans and all fiduciary decisions. These rules impose significant responsibilities on fiduciaries, but they are not impossible to comply with. The first step is to be aware of the duties, the second step is to focus on what’s best for the participants, and the third step is to seek independent and expert advice where the course is not clear. In my experience, most fiduciary lawsuits are based on situations where the fiduciaries failed to make an effort to fulfill their duties?as opposed to situations where they looked at the issue and made a bad or controversial decision.

Fred Reish is managing director and partner of the Los Angeles-based law firm of Reish Luftman Reicher & Cohen. A nationally recognized expert in employee benefits law, he has written four books and more than 100 articles on ERISA, IRS and DoL audits, and pension plan disputes. His recent writings include: “Enron, 404(c) and the Personal Liability of Corporate Officers,” Journal of Pension Benefits (Winter 2002) and Participant Directed Investment Answer Book (Panel Publishers, 2002).

Fred Reish
editors@plansponsor.com