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ERISA and the fiduciary duty to monitor appointed investment advisers, P.2

In our last post, we looked briefly at some general points of law under the Employee Retirement Income Security Act of 1974 (ERISA): first, that 401(k) plan fiduciaries can be held liable for mismanaging retirement plans; and second, that federal law exempts 401(k) plan trustees from liability for the acts and omissions of investment managers appointed by plan fiduciaries.

Both of these aspects of the law came up in a recent federal case involving a dispute between the Department of Labor (DOL) and a former employee. At the heart of the case was the fiduciary duty to monitor appointed investment advisers. The DOL had argued in the case that because the retirement plan fiduciaries were not named as trustees in retirement plan documents, they were not able to take advantage of the protections granted to trustees under the law. 

The court ended up ruling in the case, however, that ERISA actually does provide protection to fiduciaries who properly appoint investment advisers to manage plan assets, even if the fiduciaries are not designated as trustees in retirement plan documents. Fiduciaries still do, however, have a duty to monitor appointed investment managers.

The duty to monitor does not mean that fiduciaries must directly oversee plan investment decisions, though. The court said it is usually enough for fiduciaries to establish and follow routine procedures for evaluating the need to correct an investment manager’s performance deficiencies. This kind of monitoring is supposed to happen with reasonable regularity, and fiduciaries are required to actually take corrective action when necessary, rather than simply having procedures in place and never utilizing them.

In our next post, we’ll continue looking at the duty to monitor and how it should inform the relationship retirement plan fiduciaries have with appointed investment advisers, as well as fiduciary duties associated with health insurance plans. 

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