By Philip J. Koehler, Esq.

“Dirty Jobs” was a television series that ran on the Discovery Channel for several seasons.  The program featured the host, Mike Rowe, performing weird, difficult or nasty jobs coached by the real employees who did them every day.  Shows like “Sewer Inspector,” “Bat Cave Scavenger” and “Garbage Pit Technician” were truly hard to stomach.

Most people think the worst jobs are more or less like that, the kind where you have to take a shower at the end of the day.  While it never made the show, and you might not literally get your hands dirty, looking at the job of being a fiduciary for your company’s 401(k) Plan, aka an “inside fiduciary,” it has some of the worst features imaginable.

For one thing, unlike the Mike Rowe’s “dirty jobs,” an inside fiduciary already has a demanding full-time job advancing the company’s core business.  Typically, companies assign the inside fiduciary job to a task-loaded executive in HR, Risk Management and/or Finance by simply expanding their job descriptions to include a separate set of poorly described, complex (potentially conflicting) responsibilities that must be performed sporadically throughout the year.

As a fiduciary, the executive’s actions and failures to act, are always subject to scrutiny by a range of stakeholders, not the least of which are the U.S. Department of Labor, the IRS, the company’s fiduciary liability insurance carrier and, oh yes, the plan’s participants and beneficiaries, which will invariably include disgruntled former employees.  If there’s a challenge, the fiduciary’s conduct will be judged by applying some of the most exacting standards of conduct under the law, ERISA’s standards of fiduciary responsibility.  Rarely do inside fiduciaries receive more than “on the job” training.  By and large they haven’t seen, let alone read, the plan document or any of its governing instruments.  Nonetheless, these intrepid executives forge ahead with little, if any, opportunity to confer with legal counsel, taking such advice as they receive from vendors selling administrative services to the plan and posing as experts, but who, if push comes to shove, will reject any notion that they are, or would ever become, fiduciaries themselves.

An inside fiduciary can easily run afoul of four of ERISA’s fiduciary standards from time to time.  First, there’s the “prudent expert” rule, which requires a fiduciary to perform at a level that matches up with what a “prudent expert” would have done in a similar situation.  Whether, for example, that means evaluating the accuracy of the 401(k) nondiscrimination test prepared by the plan’s Third Party Administrator, adjudicating a participant’s application for a “hardship withdrawal,” or reviewing fee benchmarking data about a particular investment fund option available under the plan, the inside fiduciary should always expect to be second-guessed in the cold light of 20/20 hindsight.  The plea of doing the best he or she could do will be unavailing.  The issue will be whether, whatever he or she did or failed to do as a fiduciary, that resulted in a loss to the plan, clears the “prudent expert” high bar.  With no significant fiduciary training, generally unfamiliar with the details of the plan’s governing instruments, and squeezed by the demands of the fiduciary’s “real” job, all one can say is:  “Good luck with that!”

Second, the fiduciary must perform its duties “exclusively” for the benefit of the plan’s participants and beneficiaries.  The interests of the company’s shareholders, let’s say in meeting the last earnings forecast, closing a transaction or receiving a dividend on time, should not be factors.  But, of course, as a corporate officer, the inside fiduciary has pre-existing duties of loyalty to the shareholders.  Threading one’s way through this ethical maze, is essentially a “hat switching” exercise.  The executive must know when to take off the corporate officer hat, put on the fiduciary hat and, most importantly, create a record that the switch actually happened.  Were it only as simple as it sounds.  Let’s be real.  What corporate officer, who takes his or her career seriously, is going to take off that hat and proceed without regard for the interests of the company’s shareholders?

Third, even if the inside fiduciary can manage to switch hats properly, ERISA requires it to avoid conflicts of interest.  In most private sector companies, executives who take on an inside fiduciary role receive some of their compensation in shares of company stock or stock options.  The ostensible purpose behind such compensation, as universally claimed in the CD&A of the annual 10K filings in the case of public companies, is to “align the executive’s interests with the shareholders.”  This tension between the executive’s personal financial interests and his or her duty as inside fiduciary to act “exclusively” for the benefit of the plan’s participants and beneficiaries just became very real.  Will there be times when the demands of the executive’s “real” job, and his interests as a shareholder or option holder, appear to influence his or her decisions as a fiduciary?  The appearance of a conflict will lurk in the background.  It’s very easy to make the allegation and very hard to disprove it.  Plaintiff’s lawyers know instinctively that it’s not necessarily the facts that control a judicial outcome, it’s what the facts can be made to look like.

Fourth, a fiduciary must act only as permitted under the terms and conditions in the plan document and its governing instruments, e.g. trust agreement, investment policy statement, benefit claims procedures and QRDO determination procedures.  Inside fiduciaries who don’t take the opportunity to review and understand these documents in depth, at least to the extent that they affect their fiduciary responsibilities, and who don’t have the benefit of advice from legal counsel or others who have studied these documents, are, for all practical purposes, flying blind.

It gets worse.  If a fiduciary is sued for an alleged fiduciary breach, it’s his or her personal assets on the line.  ERISA bars the plan from indemnifying the fiduciary.  Even if a fiduciary got assurances from the company that he or she is protected by the corporate indemnification policy and covered under a separate fiduciary liability insurance policy, the fiduciary very likely never reviewed these documents (or had a lawyer review them).  How much can the fiduciary know for sure about his or her right to reimbursement?  Does it cover all damages assessed or just specific types of damages?   And….what about the cost of defense?  Will the company or the fiduciary liability insurance carrier advance the fiduciary the cost of defending himself or herself and can those funds be clawed back if the case settles or a judgment is entered entitling the plan to recover a substantial sum from the fiduciary?  If the U.S. Department of Labor asserts the 20% civil penalty against the fiduciary, will the fiduciary be reimbursed for that expense as well?  Waiting until after a complaint is filed is not the time to be trying to find answers to these questions.  Bear in mind, that any degree of malfeasance by the fiduciary may provide an exclusion from coverage under both the corporation indemnification policy and the fiduciary liability insurance policy.  Insurance carriers in this market place are well known for their creativity in alleging whatever it takes to buttress their denial of coverage and taking a “see you in court” attitude in response to a fiduciary’s claim of coverage.

As nasty as those jobs were on Mike Rowe’s show, they were each the employee’s real job.  They weren’t treated as a sideline.  They didn’t pop up as miscellaneous bullet points in the employees’ job descriptions and the employees were paid extra for doing the jobs, in many cases much more than they would have been paid for doing any other job for which they were qualified.  The employees and their employers had a clear understanding of the risks and unpleasantness of the job.  At the end of the work day, the employee with the “dirty job” went home, took a shower and was, barring injury, and after a good night’s sleep, typically as good as new.

Being an inside fiduciary doesn’t work like that.  In general, inside fiduciaries and the plan sponsors don’t fully understand the risks of fiduciary liability.  Whatever the fiduciary may do or fail to do that forms the basis of potential liability may not be known for years.  ERISA’s statute of limitations allows complaints to be filed for up to three years from the date of challenged fiduciary act, but in some cases the statute can run much longer.  Unless the case settles, it will take many more years to ultimately adjudicate the principal issues of fiduciary liability.

Thinking about candidates for the worst [blanking] job in the county, it’s hard to ignore inside fiduciaries.  They typically receive inadequate training, insufficient or ill-considered advice, and operate in the glare of readily apparent potential conflicts of interest.  So, they’re already on thin ice as far as their ERISA’s fiduciary responsibilities.  But the job should have a lock when you consider that inside fiduciaries are rarely paid anything extra for the risks they face and the added burdens the job imposes on them.  If an inside fiduciary does get into trouble, it may be challenging to get a good night’s sleep for an indefinite period of time.  It’s going to take way more than a shower to wash away the predicament he or she is in.