401(k) ERISA’s Duty of Care and Liability

Geek Out!


ERISA fiduciary liability is unlike operating a for-profit business entity, where the officers and directors may find protection from the corporate entity structure, i.e., by invoking the legal doctrine of the “corporate veil.” Any company officer, director, or key employee, in a decision-making position that is for or on behalf of plan participants or their beneficiaries, should enter into this role with his or her eyes wide open!

Furthermore, every business, regardless of its organizational structure, is subject to some level of governance expectations. In a corporate setting, officers and directors are subject to the duty of loyalty and the duty of care. Corporate officers and directors breach their duty of loyalty when they divert corporate assets, opportunities, or information for personal gain. The duty of care refers to an expectation of reasonable care while performing any acts that could foreseeably harm the corporation.

ERISA Trusts

ERISA employee benefit trusts have governance duties and expectations too – some of which are even more strict than those relating to for-profit business organizations. The rules that govern the operation of retirement plans (including 401(k) plans) were created to ensure that plan fiduciaries act for the exclusive benefit of plan participants and their beneficiaries.

These rules identify by title those who are responsible for the management of the trust. Most notable among these titles include the Named Fiduciary (in other words the plan sponsor, who is generally the company), the Plan Administrator (who generally is the same entity as the plan sponsor) and the Trustee (usually a bank or other financial institution, but it may also be an individual or a committee). To be clear, all three of these roles are held to the same “fiduciary standard of care.” Within the context of ERISA, this standard of care is generally defined as follows:

[W]ith the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” [ERISA §404(a)(1)(B)] ]