Mercedes, Lexus Forfeit in ERISA Case Underscores Need for Fiduciary Best Practices
October 3, 2018
The order by the U.S. District Court judge in Mississippi was clear: hand over the Mercedes, two Lexuses, a truck and proceeds from the sale of life insurance policies as security in the $6.49 million judgement for fiduciary violations.
The judgment against Herbert Bruister, the former CEO of a DirecTV installation subcontractor called Bruister & Associates Inc., underscores the severity of potential personal liability when companies and individuals fail to follow effective policies for fiduciary oversight of plans covered by the Employment Retirement Income Security Act (ERISA).
In this case, employees and the U.S. Department of Labor sued Bruister over manipulations of an Employee Stock Ownership Plan (ESOP) in which he allegedly inflated the valuation of the stock and caused employees to pay more than what it was worth, according to court documents. The company went out of business a few years later.
During the case, evidence was presented that showed the fiduciary had fired the attorney for the ESOP for being “too thorough” and that Bruister’s personal lawyer influenced an appraiser’s valuations to get a higher price for Bruister, which hurt the other participants in the plan.
The initial judgment was upheld by the U.S. Court of Appeals, and in 2017 a judge ordered Bruister to post his luxury vehicles and proceeds from selling his life insurance policies toward satisfying the award to the plaintiffs after finding that the amount hadn’t been satisfied yet.
In a more recent case, plaintiffs filed a proposed class action lawsuit against Home Depot Inc. this past April, alleging that the home improvement retailer violated its fiduciary responsibility by allowing investment advisors to charge unreasonable fees and choosing multiple poorly performing funds.
Both cases are sobering examples of the risk to company owners and others who serve as fiduciaries in overseeing retirement plans.
We believe the best way to avoid fiduciary liability exposure, and to strengthen a defense should lawsuits occur, is to have a formal fiduciary committee with robust policies and procedures in place plus guidance from legal counsel.
“The overarching plan is to get your fiduciary legal compliance house in order,” said Anne Tyler Hall, Owner and Principal Attorney at Hall Benefits Law, which specializes in ERISA and fiduciary legal solutions. “The best protection is that you have ongoing legal counsel to guide you through these decisions and pitfalls.”
A fiduciary committee should include at least three to five people from different departments and functions across the company such as human resources, finance, accounting, legal and operations management.
The committee should meet once a quarter, although semi-annual meetings may suffice for smaller companies with fewer participants.
It’s pivotal that everyone on the committee understands their duties and responsibilities as a fiduciary, and the gravity of their role in making decisions about the company’s retirement plan, Hall says.
The committee must have bylaws and a charter, and an Investment Policy Statement (IPS) that serves as a roadmap and playbook for their goals and the types of investments that they determine are the best fit for plan participants.
The committee’s actions must be clearly documented, including:
- Minutes of committee meetings and decisions made
- Updates and changes to the Investment Policy Statement (IPS)
- The suitability of company stock allocations as an investment option
- Adequacy of ERISA fidelity bond coverage
- Reasonableness of provider fees and investment management fees
- FINRA/SEC checks for advisors and consultants
- Confirm in writing advisor’s fiduciary status
- Create and distribute an annual report to participants
The bylaws, charter, IPS and other documents must also be reviewed and updated at least once a year to minimize risk of fiduciary liability claims, Hall says.
If the investment options haven’t been reviewed for many years, that could be problematic because it could be interpreted as lack of diligence around exploring other opportunities in the marketplace. Periodically comparing fees for asset management against other providers in the market is another shrewd tactic.
“There is this perception that you can do compliance up front and you’re ‘one and done’ and can put it on autopilot. Those can be the most catastrophic,” Hall said. “If you don’t have good infrastructure for your plan, you start making operational mistakes.”
For example, Hall has seen cases where a committee met and made decisions on an investment that their plan didn’t allow, didn’t do due diligence on the investment, took cursory minutes of their actions during the meeting and didn’t have legal counsel engaged during the process. A judge held all that against them, Hall says.
All documents, including meeting minutes and older versions of charters and IPSs, must be systematically archived so they can be easily produced if needed.
Hall has seen cases where the DOL, IRS or courts asked for documents that were 15 years old.
“Have a good governance structure so all the things you’re documenting are all in one place,” she said.
Another potential pitfall is lack of communication with plan participants.
Clear and frequent communication minimizes the risk of complaints and brings transparency around the goals of the plan, why certain funds were chosen or excluded, the fees participants are paying service providers and other key components of the overall strategy and decision making process.
Regular email campaigns, presentations, town hall meetings, Q&A sessions and annual reports to participants that highlight notable changes or shifts in strategy are great ways to keep people informed.
Following these policies and procedures can reduce the risk that your company is the subject of the roughly 174,000 calls made to the U.S. Department of Labor’s benefits hotline per year.
“Be proactive about fiduciary compliance instead of reactive,” Hall said.
People who oversee retirement plans have fiduciary responsibilities that may open them to personal risk and fiduciary liability if best practices, policies and procedures aren’t followed.
A registered investment advisor with co-fiduciary responsibility and lawyers who specialize in ERISA matters can help create a holistic plan that ensures compliance and minimizes the risk of lawsuits.