PLANADVISER - January/February 2018 - 47

fiduciary fitness
The Duty of Loyalty
ERISA demands it, how courts have interpreted it
IT IS NOT surprising that in almost every civil action alleging
a breach of fiduciary duty under the Employee Retirement
Income Security Act (ERISA), one of the alleged breaches will
be a breach of the duty of loyalty to participants and beneficiaries.
Not only does the language of the duty of loyalty
appear specifically in Title I of ERISA, but courts have consistently
emphasized the importance of this particular fiduciary
duty.
The fundamental obligation of a fiduciary
in discharging his duties is to act, as
stated in Donovan v. Bierwith, " with an eye
single to the interests of plan participants
and beneficiaries. " According to Bussian v.
R. J. Nabisco, Inc., " ERISA's duty of loyalty is
the highest known to the law. "
The Supreme Court has also joined in
this chorus, stating in Pegram v. Herdrick,
" the most fundamental duty owed by the
trustees to the beneficiaries of the trust is
the duty of loyalty. "
Section 78 of the Restatement (Third)
participants and beneficiaries, not simply to the plan itself.
At common law, the duty of loyalty and the duty of care
" The most
fundamental
duty owed by
the trustees to
of Trusts, which the Supreme Court
cited in Tibble v. Edison International, is
helpful in defining the contours of an
ERISA fiduciary's duty. It lists the three
specific components of the duty of loyalty under trust law:
1) except as otherwise provided in the terms of the trust,
a trustee has a duty to administer the trust solely in the
interest of the beneficiaries; 2) except in discrete circumstances,
the trustee is prohibited from engaging in transactions
that involve self-dealing or that otherwise involve
or create a conflict between the trustee's fiduciary duties
and personal interests; and 3) whether acting in a fiduciary
or personal capacity, a trustee has a duty in dealing with a
beneficiary to deal fairly and to communicate to the beneficiary
all material facts the trustee knows or should know
in connection with the transaction.
Thus, under this standard, it is clear that not all breaches
are often cited together, and some courts have construed
ERISA Section 404 as creating both a duty of loyalty and a
duty of prudence, which together impose an " unwavering
duty on ERISA trustees to make decisions with a singleminded
devotion to plan participants and beneficiaries and,
in so doing, to act as a prudent person
would act in similar circumstances, " as
stated in Krohn v. Huron Memorial Hospital.
It is also true that, in a particular case,
the duties of prudence and loyalty may
be " interrelated and overlapping " (Leber v.
Citigroup 401(k) Plan Investment Committee).
However, while there is a linkage
the beneficiaries
of the trust is the
duty of loyalty. "
between these two duties, in a litigation
context, duty of loyalty claims cannot
be based solely upon prudence-based
allegations. A complaint must present
separate allegations relating to the duty
of loyalty (Romero v. Nokia, Inc. and White
v. Chevron). As the Court of Appeals for
the Second Circuit recently affirmed in
Rosen v. Prudential Retirement Ins. & Annuity
Co., a plaintiff wishing to state a loyaltybased
claim under ERISA must do more than " simply recast
purported breaches of the duty of prudence as disloyal acts. "
Two other points to be aware of in breach of the duty of
of the duty of loyalty involve self-dealing. See, for example,
Kujanek v. Houston Poly Bag I Ltd., where withholding of material
information from a beneficiary was a breach of the
duty of loyalty, and Estate of Becker v. Eastman Kodak, where
making materially misleading representations violated
the duty of loyalty. Courts have also held-e.g., in Terraza
v. Safeway-that, consistent with the duty of loyalty, a fiduciary
must disclose all material investment information to
plan participants.
In the ERISA context, the duty of loyalty extends to plan
loyalty matters: First, there is authority for the proposition
that the trustee's duty of loyalty is an objective test (Washington
v. Bert Bell/Pete Rozelle NFL Retirement Plan). Second, just
as location is the key in real estate, conduct is the key element
in an action alleging breach of the duty of loyalty. As stated
in Leber: " The standard for evaluating breach of loyalty claims
focuses upon the fiduciary's conduct and asks whether the
fiduciary took all steps necessary to prevent conflicting interests
from entering into the decisionmaking process ... the
proper inquiry has as its central concern the extent to which
the fiduciary's conduct reflects a subordination of participants'
and beneficiaries' interest to those of a third party. "
Marcia Wagner is the principal and founder of the Wagner Law Group
and 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.
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PLANADVISER - January/February 2018

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