Employee benefit plan sponsors and individuals who are involved in administering benefit plans must be aware of the importance of exercising fiduciary duties prudently and monitoring service providers to avoid their own personal liability. The Employee Retirement Income Security Act of 1974 (“ERISA”) imposes obligations on individuals who are “fiduciaries” of employee benefit plans. A “fiduciary” is a person or entity who

  • exercises any discretionary authority or control with respect to the management of an employee benefit plan or exercises any authority or control regarding the management or disposition of plan assets;
  • renders investment advice as to plan assets for a fee or other compensation (direct or indirect) or has any authority or responsibility to do so; or
  • has discretionary authority or responsibility in plan administration.

ERISA imposes three basic obligations on fiduciaries. The first is to act prudently. The second is to act with undivided loyalty. The third duty is to act in accordance with plan terms. Stated another way, a fiduciary must discharge his or her duties solely in the interest of participants and beneficiaries, and must act prudently. ERISA imposes co-fiduciary liability where one fiduciary (1) participates in or conceals a breach of another fiduciary, (2) has knowledge of a breach of duty by another fiduciary and fails to take reasonable action to correct the situation, or (3) by its actions allows another fiduciary to commit a breach.

As a result of recent corporate scandals, fiduciary litigation, and government investigations of corporate governance and mutual fund providers, it is imperative for employee benefit plan fiduciaries to adopt or review their compliance procedures. Often plan sponsors and benefits committee members assume incorrectly that service providers are “handling” fiduciary obligations. The reality may likely be that administrative services agreements with those providers are unclear as to their obligations or, in many instances, relieve the provider from any obligation or liability for their misconduct. Plan documents and administrative services agreements should be reviewed and revised as necessary to protect the company and individual fiduciaries. Additionally, corporate liability insurance policies should be reviewed to verify that fiduciary claims are covered and that deductibles and policy limits remain acceptable in the current climate. These policies should also be reviewed to verify that the fiduciaries retain the right to select their own counsel, rather than having the insurance company force an attorney on them.

The focus on fiduciaries and their duties to plan participants has intensified as the number of corporations being investigated for corporate mismanagement affecting stock prices has increased. Also, a number of mutual funds are being investigated for allowing late or rapid trading. Many plans already have found themselves caught up in allegations that their participants were harmed by late and fast trading. Plan sponsors and fiduciaries must be prepared to respond to questions from plan participants concerning these investigations and what they are doing to protect participants. Plan fiduciaries should review their mutual fund choices to determine whether it is prudent to continue to offer funds that have been found to have engaged in these practices, or that are under investigation for doing so. Simply changing to other mutual funds may be costly, and there is no guarantee that the fund family selected will not come under investigation. Plan sponsors should focus on whether some fundamental change has occurred as a result of a governmental investigation that makes it imprudent to continue to make a fund available.

Plan fiduciaries should immediately review employee benefit plans and determine the entities and individuals with fiduciary status and their specific fiduciary obligations. They should determine whether changes should be made to reduce potential exposure for fiduciary claims and potential risk to the plan and participants. Finally, they should review their investment options to make sure that their selections continue to be prudent.

After a lengthy and contentious rulemaking proceeding spanning the past year, the Department of Labor has released its final regulations revising the criteria governing the white collar exemptions under the Fair Labor Standards Act (“FLSA”). These rules are scheduled to take effect in August 2004.
Most of these exemptions are conditioned upon the satisfaction of several criteria generally related to the manner in which the employee is compensated, and the employee’s job responsibilities and duties. If the exemption criteria are satisfied, then the employee is exempt from the FLSA’s minimum wage and overtime requirements.

Employers will need to carefully evaluate the new final regulations and their potential impact on their current classifications of employees. Depending upon industries involved, pay scales, and job responsibilities, there may very well be a need either to change exempt classifications, or to adjust compensation and/or job responsibilities, in order to comply with the new requirements.

From a benefits perspective, issues to be reviewed include the following: the cost of providing retirement benefits due to the reclassification of employees, the impact of these changes on cash-based bonus programs that may provide benefits based on exempt or non-exempt status, the cost and levels of life and disability insurance for reclassified employees, and communicating any necessary changes to plan participants. It is important to consider these issues as you are reviewing the impact of these regulations on your payroll practices.

Please contact Dana Thrasher in our Birmingham office at (205) 252-9321 or Ira Friedrich, Carl Cannon or Andrea Bailey in our Atlanta office at (404) 525-8622 if we can assist you with your fiduciary compliance review, or reviewing your benefits practices in response to the final overtime rules.  

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