Over and over during your time as a trustee you will hear about needing to act in accordance with your “fiduciary duty.” Instinctively, you probably understand that this duty obligates you to act with good intentions and not in your own self interest. However, more than good intentions are required of trustees in order for them to meet their basic fiduciary duty.
Most of the trust funds in our industry are subject to the Employee Retirement Income Security Act of 1974, as amended, (“ERISA”). Those not can still be well guided by the fiduciary responsibilities set forth in ERISA. These responsibilities include:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
- Carrying out their duties prudently
- Following the plan documents (unless inconsistent with ERISA)
- Diversifying plan investments
- Paying only reasonable plan expenses.
The duty to act prudently is one of a trustee’s central responsibilities under ERISA. Prudence requires the trustee to act with the same care, skill and diligence under the circumstances that a prudent man acting in a like capacity and familiar with such matters would use in operating an enterprise with similar aims and characteristics.
Boiled down to its essence, you need to make educated and well-reasoned decisions. When the Department of Labor or a court is looking to determine if a trustee acted prudently, they will focus on the process used for making decisions. Therefore, board of trustee minutes should not only document decisions but also the basis for those decisions.
If you looked at just the prudent man standard as articulated above, it potentially requires the trustee to have an extensive knowledge in a large variety of areas. If that were really required, trust funds wouldn’t find many (or any) trustees. Therefore, lacking the required expertise, a trustee is expected to hire someone with that professional knowledge to carry out the investments and other functions of the fund. (We’ll address hiring and monitoring service providers in a future post.)
Following the terms of the plan document is also an important responsibility. When ERISA speaks of the plan documents in these circumstances, it is speaking not of just the plan document that sets forth the benefits provided by the fund but also includes the trust agreement and any amendments thereto, the collective bargaining agreement as well as any written policies or procedures adopted by the trust fund. These documents serve as the foundation for plan operations. It’s important to be familiar with these documents and to periodically review the documents to make sure they remain current.
Diversification – another key fiduciary duty – helps to minimize the risk of large investment losses to the plan. Investments should be diversified by not only the types of investments, such as stocks, bonds, real estate, but by class within each investment. Unfortunately, there is no magic diversification formula into which the trustee can diversify investments and then rest easy. Rather, trustees must use prudence in making diversification decisions and should consider each plan investment as part of the plan’s entire portfolio. Because of the rigors this involves, it is best to rely upon an investment professional to develop and evaluate a diversification policy. Once again, trustees will want to document their evaluation and investment decisions.
Finally, the requirement to pay only reasonable plan expenses requires the trustee to scrutinize everything. This requirement encompasses the benefits paid by the trust to participants and beneficiaries as well as the fees paid to service providers, for rent and overhead, right down to trustee reimbursements. A wise trustee is one that considers no cost too small for scrutiny. In a future post of the Trustee Advisor, we’ll look closer at prohibited transactions.