PLANADVISER - May/June 2018 - 51

fiduciary fitness
Limited Liability of a Trustee
ERISA constricts that fiduciary's duty of prudence
P
Employee Retirement
lan sponsors may have an understanding
of the different levels of
fiduciary responsibilities under the
Income Security
The fiduciary
duties of a
Act (ERISA) for discretionary trustees and
directed trustees, but may not appreciate
fully the implications of those distinctions,
which were emphasized by a 2017
case in the Southern District of New York,
Harley, et al., v. Bank of New York Mellon. In
that case, a series of miscommunications
between the plan sponsor's investment
committee and the Bank of New York
resulted in funds that were intended to be invested in equities
being invested in cash equivalents, with a loss to the
plan of $1.7 million. While the bank's conduct had negative
consequences and its services as a directed trustee were
terminated, it can be argued that its standard of services
did not fall below the standard of services established
under ERISA for a directed trustee.
Under ERISA Section 403(a), where a plan expressly
provides that the trustee or trustees are subject to the direction
of a named fiduciary who is not a trustee, the trustee
is subject to " proper directions of such fiduciary which are
made in accordance with the terms of the plan and which
are not contrary to " ERISA. As a result, the fiduciary duties of
a directed trustee under ERISA are " extremely narrow, " and
are " significantly lower than the duties generally ascribed to a
discretionary trustee under common law principles. " That is,
a directed trustee's fiduciary liability is limited to instances in
which it fails to follow proper directions of a named fiduciary
or it complies with directions that are improper, or contrary
to the plan or ERISA. While a directed trustee must discharge
its own duties in conformity with the prudent man standard
of care, courts have indicated that a directed trustee's duty of
prudence is " quite constricted. "
In F.W. Webb Co. v. State Street Bank and Trust Co., the District
Court for the Southern District of New York wrote, " typically,
a directed trustee is only charged with knowledge that
an investment instruction is imprudent where the trustee
possesses nonpublic information that a company's financial
statements are false or where it possesses public information
showing with near certainty that a company is on the
brink of collapse. " That analysis is consistent with the position
of the Department of Labor (DOL) in Field Assistance
Bulletin (FAB) 2004-3 that, with respect to determining the
prudence of a particular investment, generally the directed
trustee has no obligation to evaluate the merits of a named
directed trustee
under ERISA
are " extremely
narrow. "
fiduciary's investment directive, absent its
possession of material nonpublic information
regarding the security.
In this case, plaintiffs argued that it
was not prudent for BNY Mellon to reallocate
$15 million from one cash account to
another, an investment decision that made
no sense in the context of the plan and the
direction given: " No prudent trustee could
have thought Wellspan wanted to pointlessly
transfer millions of dollars from
account to account only to end up in the
very same money market fund. "
However, because of the very limited role of a directed
trustee, BNY Mellon had no obligation to advise the plaintiffs
that its investment direction was imprudent, or to reach
out to plaintiffs and suggest that it do something different.
In Harley, the District Court also considered, and rejected,
plaintiffs' course of performance arguments for imposing a
fiduciary duty. As it applied to the particular case, plaintiffs
argued that BNY Mellon knew when it needed wire instructions
to execute investment instructions and when it did
not, but the firm never provided the plaintiffs with a clear
and uniform list of when wire transfer instructions were or
were not needed.
Plaintiffs further contended that, in light of BNY Mellon's
knowledge and their own lack of knowledge of when wire
transfer instructions were needed, BNY Mellon had consistently
alerted the plan, either verbally or in writing, when
wire instructions were needed. The District Court was
unpersuaded. It acknowledged that, while it may have
been good customer service to do so, BNY Mellon did not,
as a directed trustee, have a responsibility under ERISA to
educate plaintiffs about how to prepare investment instructions
or advise plaintiffs on an unsolicited basis as to how
best to implement its intentions.
Takeaway: Best practices for a directed trustee might
be to take a particular action, but a directed trustee is not
legally obligated under ERISA to adhere to a best practices
standard, so its failure to do so does not result in a breach
of fiduciary liability.
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.
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