Businesses woo customers. But when the "customer" is a fiduciary acting on behalf of the "beneficiaries" of that fiduciary duty, the wooing better be solely for the benefit of the beneficiaries.
Despite this clear, well-established legal paradigm of fiduciary duty, corporate officers acting as fiduciaries of employee benefit plans don't seem to get it. It is commonplace for corporate officers to accept gifts or gratuities from a service provider, or from a prospective service provider, of an employee benefit plan of the corporation. In response, the Department of Labor (DOL) began taking an active interest on the subject in March of 2007. At that time, the Director of Enforcement of the DOL's Employee Benefits Security Administration warned that plan fiduciaries "need to be very, very careful under ERISA about accepting any gifts or gratuities from a service provider, even items of modest value." The Director further stated that "every one of [the DOL's regional enforcement offices] will be looking at this issue." Later, in November of 2007, the DOL published new annual reporting forms for employee benefit plans that included the following statement concerning plan service providers: "gifts or gratuities of any amount paid to or received by plan fiduciaries may violate ERISA and give rise to civil liabilities and criminal penalties." The DOL later clarified in its enforcement manual that any such gifts or gratuities with an annual aggregate value of $250 would be considered "substantial" for purposes of the fiduciary's breach of his or her duty to act for the exclusive benefit of the employee participants of the benefit plan.
In publishing these statements, the DOL was grappling with a widespread problem. With the repeal of the Glass-Steagal Act in 1999, depository/lending banking, investment banking and insurance could all be part of one corporate affiliate. Glass-Steagal had previously prohibited such businesses from having any connection to each other. Now, a single company offering depository, investment or insurance services to an ERISA benefit plan has a much wider variety of improper inducements to offer corporate officers deciding which company will be awarded the business of providing services to the corporation's employee benefit plans. Such improper inducements can be for the benefit of the fiduciary or the corporation. For example, a company seeking to provide investment management services to a retirement plan could offer the fiduciary a sweetheart deal on his personal life insurance. Or a company could offer the corporation favorable terms on a business loan in exchange for the company's affiliated mutual funds being placed in the lineup of investment options for the corporations' 401(k) plan. The problem in such cases is the fiduciary's conflict of interests regarding his or her duty under ERISA to act for the "sole and exclusive benefit" of the plan's employee participants in selecting a service provider for the plan.
The problem becomes a really big one if the service provider performs poorly, costing the plan relative to how the plan would have done with a different service provider from the relevant market of such providers. That is, if the service provider was selected to perform services for an employee benefit plan by a fiduciary operating under a conflict of interest, the law generally will assume that such losses to the plan were caused by the tainted selection of the service provider. And such "losses" need only be relative to how the plan would have done with a different service provider. For example, if an investment manager were selected under a conflict of interest, even if the plan's investments did not literally "lose" money, the plan still suffered "losses" if the investments didn't do as well as they would have with another investment manager that realistically could have been selected absent the conflict of interest.
This type of breach of fiduciary duty occurs frequently but is only occasionally remedied. The repeal of Glass-Steagal substantially increased the opportunities of benefit plan fiduciaries to be offered opportunities to act under a conflict of interest in selecting plan service providers. To know they have a claim for a breach, however, plan participants would first need to know of the improper gift or gratuity. Secondly, they would need to be willing to bring a claim against the fiduciary, and the fiduciary is typically a powerful officer in the corporation that employs the plan participants. Lastly, the plan participants would need to understand that the plan had suffered a "loss," which might not be obvious. Such a "loss" would typically be gleaned by comparing the performance of the service provider to its competitors, such as comparing the investment returns of a selection-tainted investment manager to the relevant "benchmark" of returns on similar investments. Nonetheless, the financial security and integrity of employee benefit plans depends on calling to account such breaching fiduciaries.
