ERISA Section 409(b).
When ERISA [Employee Retirement Income Security Act] attorneys speak with their clients regarding fiduciary liability under ERISA Section 409, the focus is almost entirely on Section 409(a), which provides that if fiduciaries breach their duties under Title I of ERISA, they are personally liable to make good to the plan any losses it experienced resulting from that breach and to restore to it any profits the fiduciary derived from using plan assets.
A breaching fiduciary is also subject to such other equitable or remedial action that a court might impose, including the person’s or entity’s removal as a plan fiduciary. In addition, under ERISA Section 502(l), the breaching fiduciary is subject to a civil penalty of 20% of the applicable recovery amount.
That guidance is at least facially more relevant than the statement under Section 409(b) that “no fiduciary is liable for a breach of fiduciary duty under this title if such breach was committed before he became a fiduciary or after he had ceased to be a fiduciary,” although it is questionable whether 409(b) can be used as a shield to protect a prospective fiduciary from liability arising out of his, or its, own misconduct, such as the concealment of material facts during the negotiation of an investment management contract that led to fiduciary status.
Note the case of International Brotherhood of Painters and Allied Trade Union and Industry Pension fund v. Duval. Similarly, in Mathis v. American Group Life Insurance Co., the Missouri District Court questioned whether Section 409(b) would be applicable if a fiduciary had knowledge of or a role in a predecessor’s acts or omissions, before becoming a fiduciary.
However, while a prior plan fiduciary may disregard what occurred after he left, this is subject to the caveat that liability may be imposed if, before he ceased being a fiduciary, he set in motion the forces that caused the actual damage of which a plaintiff complains. Note the case of Sheet Metal Workers v. National Pension Fund. The same is not equally true of a successor trustee, as evidenced by the recent Maryland District Court case of Feinberg v. T. Rowe Price Group Inc.
The Maryland District Court relied upon a 1976 Department of Labor (DOL) advisory opinion, which it held was “entitled to respect” under Supreme Court guidance because of its “power to persuade.” The DOL explained that Section 409(b) “did not exempt an ERISA fiduciary from carrying out its responsibilities under Title I of ERISA.” For example, although a fiduciary may not be liable under Section 409 for the acts of predecessor fiduciaries, if he knows of a breach of responsibility that one of them committed, he would be obligated to take whatever action is responsible and appropriate under the circumstances to remedy it. Failure to take such action would constitute a separate breach of fiduciary responsibility by the successor trustee.
As set forth in Section 223 of Restatement of Trusts (Second), also cited by the District Court in Feinberg, common law imposes liability on a successor trustee to remedy the breach of a prior trustee and imposes liability for the breach of the duty to the extent to which a loss results from the successor trustee’s failure. This analysis is also consistent with ERISA Section 405(a)(3), which imposes co-fiduciary liability if a fiduciary has “knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy such breach.” However--at least according to some courts--to avoid undermining Section 409(b), for there to be co-fiduciary liability for a successor trustee, he would need to have actual knowledge: 1) that the other person was a fiduciary with respect to the plan; 2) that the other person participated in the acts that constituted the breach; and 3) that the act in question was a breach.
Finally, it should be noted that some district courts have reached a contrary conclusion. For example, the recently decided Tennessee District Court case of Hatmaker and Edwards v. Consolidated Nuclear Security favorably cited Beauchem v. Rockford Products, in which the District Court concluded that “allowing a fiduciary to be liable for failing to correct a breach by prior fiduciaries would destroy the protection of ERISA Section 1109(b).”
Takeaway: Nothing new in Feinberg but a reminder that a new fiduciary does not have “a hall pass” with respect to prior conduct of his predecessor that was a breach of fiduciary duty.
Marcia Wagner is an expert in a variety of employee benefits and executive compensation areas, including qualified and nonqualified retirement plans, and welfare benefit arrangements. She is a summa cum laude graduate of Cornell University and Harvard Law School and has practiced law for 31 years. Wagner is a frequent lecturer and has authored numerous books and articles.