Indiana Law Review


Directors' Liability for Corporate
Mismanagement of 401(K) Plans: Achieving the

GoalsofERISAinEffectuatingRetirementSecurity

KiMBERLY Lynn Weiss'

Introduction

Enron employees, who lost most of their retirement savings when Enron
stock plummeted from $80 to .40 cents per share, ^ unfortunately are not alone.

The recent explosion in 401(k) class action litigation has produced several
corporate defendants who are similarly situated to Enron, including Global
Crossing, WorldCom, Williams Cos., Rite-Aid, Lucent, Xerox, EDS, Duke
Po\yer, Qwest, McKesson, Bristol Myers, AOL Time Warner, Providian
Financial,^ IPALCO,^ and Kmart."^ Lenette Grumpier, a fifty-one-year-old single
mother from Rochester, New York, lost everything in her 401(k)
account—$86,000—when Global Crossing stock collapsed early in 2002.^
Marjorie Young, an employee at Indianapolis Power & Light Company
(IPALCO) lost the $200,000 that she had saved in her thirty-seven years at
IPALCO after it merged with AES Corporation and the shares fell by nearly
ninety-seven percent.^ The eighty-two year-old IPALCO mailroomworker could
not even afford to replace the windows in her drafty old house.^ At the same
time that IPALCO employees lost $95.4 million in their 401(k) plans in 2001,
fourteen key officers and directors sold more than $22 million of their company
stock just months before the stock price dramatically fell. As the officers and
directors were selling their stock, they were simultaneously urging plan

* J.D. Candidate, 2005, Indiana University School of Law—Indianapolis; B.A., 2002,
Indiana University—South Bend, South Bend, Indiana.

1

.

Rob Norton, What if Your Company 's 401(k) Plan Lays an Egg ?, CORPORATE BOARD

Member, Nov.-Dec. 2003, available at http://www.boardmember.com/issues/archive.pl7article

_id=11727.

2. Evan Miller, Current Issues in Employee Benefits Litigation, 697 PLI/LiT 825, 828

(2003).

3. Chris O'Malley, StockSale: IPALCO Chiefs DefendSelling StockShares BeforeMerger,

INDIANAPOUS Star, Dec. 1, 2002, at AOl.

4. Gary Haber, Former Kmart Executives Want Judge to Drop Suit over the Retailer's

Finances, DETROIT FREE PRESS, July 1, 2003, available at 2003 WL 56852233.
5. Jeff Manning, The 401(k) Problem, PORTLAND Oregonian, Dec. 1, 2002, at EOl,

available at 2002 WL 3985590. However, companies do not have to fail for employees to lose
their retirement savings in 401(k) plans that are heavily invested in employer company stock.

Lucent Technologies, Qwest Communications International, and Tyco International, for example,

avoided bankruptcy, while employees still lost a majority of their retirement savings when the

company's stock dramatically fell. Id.

6. O'Malley, supra note 3, at AOl.

7. Id.



818 INDIANA LAW REVIEW [Vol. 38:817

participants and beneficiaries to hold IPALCO stock to exchange for AES
shares.^ Sadly, Grumpier' s and Young's stories are not atypical, and thousands
of other employees have found themselves in similar positions.

The Employee Retirement Income Security Act of 1974 ("ERISA"),^ the
federal statute covering 401(k) plans, *° was established to protect the benefits of
employees, such as the those at Global Crossing and IPALCO. ERISA is meant
to protect those employees from abuse by employers, or those acting on the
employer's behalf, by regulating fiduciaries' conduct and making them
personally liable for breaches of fiduciary duty.^^ This Note focuses on the

ERISA fiduciary duties owed by directors to employees as a result of directors'
involvement in the management and administration of 401(k) plans. Under
ERISA, in addition to officers and plan committee members, directors have a
fiduciary duty to manage the investment process of their company's 401(k) plan
prudently and solely in the interest of the plan participants.*^ In order to avoid

liability for the mismanagement of plan assets, directors must be aware of what
their fiduciary obligations entail. Unfortunately, neither ERISA nor the courts
have clearly outlined director's fiduciary duties with regard to 401(k) plans.

Therefore, a portion of this Note is devoted to outlining situations where

directors have been found in violation of their fiduciary duties, thus providing

directors with a better understanding of their responsibilities. By understanding
their responsibilities, directors can help prevent plan losses in the first instance,

thereby shielding themselves from liability.

As litigation over 401(k) plan losses increases in the future, it is even more
crucial that directors understand their fiduciary obligations under ERISA. The
number of fiduciary lawsuits against directors in companies offering a 401(k)
plan will likely increase for several reasons: (1) the increased use of such plans

by employers as retirement security,*^ (2) the lack of diversification and heavy

8. Id.

9. 29 U.S.C. §§ 1001-1 169 (2000).

10. ERISA is the primary body of federal law that provides for the protection of employee

benefit rights. Martha L. Hutzelman, Fiduciary Liability ofEmployers Sponsoring Pension Plans,

SH020 ALI-ABA 307, 309 (2002).
1 1

.

Jerald I. Ancel, Counselfor Debtors Beware!, AM. Bankr. InST. J., July-Aug. 2001 , at

8 (2001).

12. Martin v. Marline, 15 Employee Benefits Cas. 1138, No. 87-NC-115J, 1992 U.S. Dist.

LEXIS 8778, at *26-34 (D.C. Utah Mar. 30, 1992).

13. Companies are increasingly moving from guaranteed pension plans, which are in the

category of defined benefit plans, to uninsured employee-managed 401(k) plans, which are in the

category of defined contribution plans. O'Malley, supra note 3, at AOl; see also Employee

Benefits Sec. Admin., U.S. Dep't of Labor, Does 401(k) Introduction Affect Defined

BenefitPlans? (n.d.), available at http://wv^^.dol.gov/ebsa/publications/papkepensionreport.html

(last visited Apr. 17, 2005). Defined contribution plans have increasingly become popular among

employers, and from 1979 to 1998 they have more than doubled from 331,432 to 673,626, as

reported by the Congressional Research Service in July 2002. In the same years, the number of

defined benefit plans declined from 139,489 to 56,405. Manning, supra note 5, at EOl . Currently,



2005] EFFECTUATING RETIREMENT SECURITY 819

investment in employer stock options for 401(k) plans, ^"^ (3) the recent economic

downturn, and (4) the high media exposure of recent accounting scandals

negatively affecting 401(k) plans. ^^ Consequently, given that a fiduciary who
breaches his ERISA duties is personally liable to make good any losses to the
plan resulting from his breach of fiduciary duty^^ and given that the average cost

of merely defending a fiduciary claim was estimated to be $124,000 in 2000,*^

directors must take extra precautions to help ensure that they do not become
subject to such lawsuits in the future.

Unfortunately, too many directors underestimate their role as fiduciaries in
401(k) plans. Although many directors do not realize this, ERISA's fiduciary

forty-seven million Americans are saving for retirement in 401(k) plans. Penelope Wang, Is Your

401(k) Safe? What the Fund Scandal Means for Your Retirement?, MoisfEY, Jan. 1, 2004, at 72,

available at 2004WL 55037553. The definitions of defined benefit plans and defined contribution
and their distinctions are further outlined in Part I of this Note. See infra Part I.

14. ERISA does not forbid investment of 401(k) plan assets in employer securities. Susan

J. Stabile, Pension Plan Investments in Employer Securities: More Is Not Always Better, 15 YALE

J. ON Reg. 61, 64 (1998). In fact, in 401(k) plans, employees may invest up to 100% of their assets

in employer securities if the plan document allows, as well as hold a substantial percentage of an

employer's outstanding securities. Id. at 68. For example, in January 2001, Enron employees had

approximately sixty percent of401 (k) funds invest in company stock, a third ofwhich was company

matched with restrictions on diversification. The Enron Collapse and Its Implicationsfor Worker

Retirement Security: Hearings Before the House Comm. on Education and the Workforce, 107th

Cong. 1 12 (2002) (statement of Mikie Rath, Benefits Manager, Enron Corporation), available at

http://benefitslink.com/articles/enronretirementsecurityhearing20020207. pdf. In 1996, according

to Access Research Inc., a financial services consulting firm, nearly a quarter of the $675 billion

in 401 (k) plans was invested in employer securities. Ellen E. Schultz, Frittered Away: Some

Workers Find Retirement Nest Eggs Full of Strange Assets, WALL ST. J., JUNE 5, 1996, at Al,
available at 1996 WL-WSJ 3105461.

15. Jeffrey D. Mamorsky & Terry L. Moore, Greenberg Traurig LLP, Fiduciary Audit
Insurance: Risk Management for Post-Enron ERISA Compliance, GT ALERT, June 2002, at 2,
available af http://www.gtlaw.com/pub/alerts/2002/mamorskyj_06a.asp; see also supra notes 1-5.

Merely examining Enron's 401(k) plan losses alone, which were about $1.3 billion, illustrates the

seriousness attributable to the recent 401(k) scandals. Manning, supra note 5, at EOl.

16. 29U.S.C. § 1109(a) (2000).

17. ERISA Suits Spark Liability Concerns, FiN. EXECUTIVE, June 1, 2004, at 57, available

at 2004 WLNR 14766919. In addition to defense costs, the average indemnity payment per claim
in 2000 was $1 .2 million, up from $900,000 in 1999. Id. Although in larger corporations, directors

are sometimes protected against personal liability through their company's indemnity or through

fiduciary liability insurance, id., protection often is limited to a certain dollar amount. See infra

notes 20-23. And even if directors are wholly protected against personal liability, they nonetheless

have a significant interest in avoiding such lawsuits, which can be devastating to their corporation'

s

finances, reputation, and overall well-being, in addition to time-consuming and embarrassing for

the directors, who may be displaced from the company as a result of their negligence and/or

misconduct.



820 INDIANA LAW REVIEW [Vol. 38:817

obligations are among the "highest known to the law."^^ For example, although
the directors and officers in Enron were not directly involved in the management
or administration of Enron's defined contribution plans, they are still subject to

liability under ERISA for any breach resulting from their discretionary control
over the plan investments.^^ If Enron's directors lose this legal battle, they will

be subject to personal liability in an amount that will almost assuredly exceed the
eighty-five million dollars they have in fiduciary liability insurance coverage

given the fact that plan losses exceed one billion dollars.^° In fact, eighteen

former Enron directors have already agreed to pay $ 168 million to settle a lawsuit
brought by investors for alleging not adequately overseeing the company.^ ^ Ten
directors will be contributing $13 million of their own money, thereby agreeing
to personal payouts to shareholders.^^ The Enron settlement followed the
WorldCom settlement where directors named in a class-action shareholder
lawsuit for similar allegations agreed to pay $18 million of their own
money.^^Accordingly, for obvious reasons, directors must educate themselves

about the numerous ways they can be subject to liability under ERISA and take
the necessary precautionary measures to avoid liability by careful planning,

management, and oversight.

Currently, the liability of corporate directors surrounding mismanagement
of 401 (k) plans is anything but clear. However, with the increase in high-profile

cases, the set of legal precedents produced as a result of these cases will likely

better define company obligations to employees, providing directors with a much
better roadmap to follow when dealing with 401(k) plans. In light of the recent
events, it is expected that courts will more vigorously scrutinize directors'
ERISA fiduciary duties, holding the board accountable for their involvement,
even if their involvement is limited to appointment of plan administrators (those

who actually manage the plan assets).
However, before the courts take drastic measures to hold board members

18. See Russian v. RJR Nabisco, Inc., 223 F.3d 286, 294 (5th Cir. 2000).

19. John D. Hughes & Jason M. Rodriguez, Securities and ERISA Suits—A Fatal
Combination, in NATIONAL UNDERWRITER PROPERTY & CASUALTY-RISK & BENEFITS
Management, Nov. 2 1 , 2003, available at 2003 WL 6982 1726. The plaintiffs alleged that Enron
directors and officers breached their fiduciary duties by failing to adequately monitor and oversee

plan administrators, by issuing deceptive public statements about the company's financial

condition, and by encouraging employees to continue to invest in company stock when the directors

and officers knew or should have known that such an investment was imprudent. Id.

20. Jeff Manning, 401(k) Lawsuits Might Aid Reform, Cm. Trib., Dec. 31, 2002, at 5,

available at 2002 WL 104502 170; Jim Hopkins, Firms May Boost 401 (k) Insurance, USATODAY,
Jan. 28, 2002, avai/aZ^/ear http://www.usatoday.com/money/energy/2002-01-29-enron-insurance.

htm; see also Lawrence, infra note 216.

2 1

.

Matt Krantz & Greg Farrell, Ex-Enron Officials OK$168M Payment, USATODAY.COM,
Jan. 10, 2005, (2va//a^/ear http://www.usatoday.com/money/industries/energy/2005-01-10-enron-

usat_x.htm.

22. Id.

23. Id



2005] EFFECTUATING RETIREMENT SECURITY 82

1

personally liable for plan losses, they should take a step back and analyze the

cases in light of the competing congressional purposes and public policy interests

behind ERISA. There is obviously a very strong public interest in maintaining

the security ofAmerica' s retirement system, as evidenced by congressional intent

in the establishment of ERISA.^"^ The court in Hollingshead v. Burford
Equipment Co?^ outlined this congressional intent: "[T]his statute was passed

with the overwhelming purpose of protecting the legitimate expectations

harbored by millions of employees of a measure of retirement security at the end

ofmany years of dedicated service. "^^ However, equally important in protecting
retirement security, the courts must not make the burdens so tenuous on
employers that they no longer have an incentive to provide 401(k) plans,^^ a

phenomenon that has already occurred with defined benefit plans.^^

24. As retirement plans rapidly began to increase in the 1970s, Congress, noting the rapid

growth in such plans, set out to "assur[e] the equitable character of [employee benefit plans] and

their financial soundness." Cent. States, Southeast & Southwest Areas Pension Fund v. Cent.
Transport, Inc., 472 U.S. 559, 570 (1985) (quoting ERISA statute) (alterations in original); ERISA

of 1974, Pub. L. No. 93-406, § 2, 88 Stat. 829, 829 (outlining the goal of ERISA as to promote

retirement security).

25. 747 F. Supp. 1421 (M.D. Ala. 1990).

26. Id. at 1443 (quoting Rettig v. Pension Benefit Guar. Corp., 744 F.2d 133, 155 (D.C. Cir.

1984)).

27. Employers are not required to establish employee benefit plans; rather, such plans are

completely voluntary. However, if an employer chooses to offer the plans, it must abide by ERISA.

See In re WorldCom, Inc., 263 F. Supp. 2d 745, 757 (S.D.N.Y. 2003). The decline of 401(k) plans

would create disastrous results for the American people with respect to their retirement security.

For many investors, 401(k) plans, or other types of defined contribution plans, make up their entire

financial retirement plan outside of their home equity. Wang, supra note 13, at 72. In fact,

according to the Federal Reserve, $2.2 trillion was invested in the defined contribution system in

1998. 401(k) Day an Occasionfor 55 Million Americans to Celebrate, PSCA.ORG, June 17, 1999,

flf http://www.psca.org/press/pl999/junel7.html.

28. The reason that defined benefit plans (guaranteed pension plans) have taken a back seat

to defined contribution plans (401(k) plans) is because ERISA placed too high administrative and

regulatory costs on defined benefit plans. See supra text accompanying note 13; Susan J. Stabile,

The Behavior ofDefined Contribution Plan Participants, 11 N.Y.U. L. REV. 71, 85 (2002); see

generally Eugene P. Schulstad, Note, ERISA Disclosure Decisions: A Pyrrhic Victory for
Disclosure Advocates, 34 IND. L. REV. 501 (2001). When ERISA was enacted in 1974, 401(k)

plans did not exist. The retirement plans offered by employers were guaranteed pension plans,

Lorraine Schmall, Defined Contribution Plans After Enron, 41 BrandeisL.J. 891, 899 (2003), and

Congress's intent with ERISA was to increase the overall number of retirement plans and the

number of employees entitled to receive employee retirement benefits. However, instead "the

combined burdens placed on employers by the passage of ERISA and subsequent court decisions

have caused considerable tension between the needs of businesses and the desires of [guaranteed

pension] plan participants." Schulstad, supra, at 501 . Thus, in light of the recent upsurge in 401(k)

litigation, courts must be careful not to follow the same pattern with directors' liability for 401(k)

plans.



822 INDIANA LAW REVIEW [Vol. 38:817

The court in Varity Corp. v. Howe, recognized these competing interests:

[Cjourts may have to take account of competing congressional purposes
[when interpreting ERISA fiduciary duties], such as Congress' desire to
offer employees enhanced protection for their benefits . . . and ... its

desire not to create a system that is so complex that administrative costs,
or litigation expenses, unduly discourage employers from offering

welfare benefit plans in the first place.^^

Essentially, Americans will only realize the protections underlying ERISA if the
interests ofplan participants and directors/employers can be adequately balanced

so that the ultimate goal of ERISA enforcement is realized—to provide
retirement security.

Although courts need to provide the necessary incentives for directors to

effectively carry out their obligations as ERISA fiduciaries with regard to 401(k)
plans, they must not do so in a way that places too heavy a burden on directors.
Thus, the courts should hold directors liable only for mismanagement of plan
assets for which they could have prevented through careful review of plan

investment decisions, particularly the procedures followed in determining plan

options. This is not a standard where directors are required to reevaluate

decisions made by competent plan administrators, but rather, a standard where
directors are required to review and oversee investment decisions, keeping their

eyes open for possible breaches of fiduciary duties, such as conflicts of interests.

In effect, directors should only be found liable if they were on notice of fiduciary

violations, or would have been on notice had they been properly carrying out
their duties of oversight. Holding directors liable for abuses of plan assets that

they could have prevented only by exacting investigation will place too high

administrative and litigation costs upon companies. However, it is equally

important to provide incentives for directors to correctly manage 401(k) plan

assets so that employees are left with adequate retirement security. Therefore,

courts should strictly enforce ERISA obligations by holding directors personally
liable for plan losses if they fail to adequately monitor plan assets by careful

review.

Part I of this Note provides a basic understanding of 401(k) plans. Part 11

provides a general understanding of the fiduciary duties under ERISA and how
fiduciary status is determined. Part m specifically outlines the general fiduciary
status of a director and further outlines the various situations in which a director

is likely to be held liable with respect to 401 (k) losses. The particular situations
outlined in Part HI include: exercising de facto control over investment options,

appointing and monitoring responsibilities, and misrepresenting or omitting

information regarding 401(k) investments. Part IV offers advice for directors to

reduce their potential liability by complying with 404(c) regulations, various

other procedures, and obtaining fiduciary liability insurance. Finally, the Note

concludes by analyzing the potential conflict between the competing interests of

29. 516 U.S. 489(1996).

30. Id. at 497.



2005] EFFECTUATING RETIREMENT SECURITY 823

imposing ERISA fiduciary obligations on directors and ensuring that employers
continue to establish and offer 401(k) plans.

I. Brief Introduction to Understanding 401(k) Plans

Two broad categories of retirement plans which ERISA recognizes are
defined benefit plans and defined contribution plans.^^ Unlike defined benefit

plans, defined contribution plans are not guaranteed^^ and instead shift

investment risks squarely onto the shoulders of participants, regardless of their

investing know-how.^^ The most common type of defined contribution plan is
a 401(k) plan, which allows employees to put a part of their salaries into a

retirement account that is tax-deductible.^"^ Under such plans, the employees'

earnings are only taxed when the employee retires or otherwise withdraws money
from the account.^^ Employers can choose to contribute to the account, which

they often do by using employer stock as the matching contribution.^^ These

plans allow employees to direct the investment of their account balances by
choosing among the investment options offered by the employer.^^ Thus, in a
defined contribution plan, employees are not promised a specified pension

benefit, but rather, benefits are determined by the value of the investment when
the employee takes money out of the plan.

Another popular type of defined contribution plan that is very similar to a

401(k) plan and which often is used in conjunction with a 401(k) plan, is the

employer stock ownership plan (ESOP).^^ An ESOP is an individual account

31. Stabile, supra note 14, at 66 (ERISA recognizes these two broad categories within 29

U.S.C. § 1002(34)-(35) (2000)).

32. Under a defined benefit plan, a company promises and guarantees cash pension benefits

after the employee works a specified amount of time based on a pre-determined formula. 29 U.S.C.

§ 1002(35) (2000). Pension plans are also federally guaranteed by the Pension Benefit Guarantee

Corporation (PBGC). Schmall, supra note 28, at 901 . Because the employer is managing the funds

and determining how it is invested, the breadth of legal obligations under such plans are

significantly greater. Id. at 897.

33

.

Manning, supra note 20, at 5 . Other types of defined contribution plans include: 40 1 (a),

403(b), 457, KEOGH, Simplified Employee Pension (SEP), Individual Refirement Account (IRA),
and SIMPLE Plan. For further information on the above plans, see Northwestern Mutual Financial

Network, Types of Defined Contribution Plans, at http://www.nmfn.com/tn/learnctr~articles~

page_types_defn_cont (last revised Dec. 2003).

34. Schmall, supra note 28, at 894. 401(k) plans were first introduced in a 1978 amendment

to the Internal Revenue code (IRC) § 401(k) in order to allow employees to put a portion of their

earnings away for retirement and to allow employers to make contributions, without having to pay

taxes on the savings. Id. at 899. The law did not go into effect until January 1, 1980. Id. at 900.

35. Mat 894.
36. Id

37. Stabile, supra note 14, at 66.

38. Id.



824 INDIANA LAW REVIEW [Vol. 38:817

pension plan that is designed to invest primarily in employer securities.^^ An
employer who estabhshes an ESOP contributes either stock or cash to the plan,
which is then used by the ESOP trustee to purchase shares."^^ Many companies
will combine an ESOP with a 401(k) plan using stock contributions to match the
40 Uk),"^^ and, consequently, fiduciary obligations of both 401(k) plans and
ESOPs are often similarly analyzed, as illustrated within the text of this Note."^^

n. Brief Introduction TO Understanding ERISA

A. General Fiduciary Duties Under ERISA

Under ERISA, a fiduciary is one who owes duties to the plan participants and
beneficiaries, and thus, must exercise care, skill, prudence, and diligence in

fulfilling those duties."^^ The fiduciary obligations under ERISA are similar to
that of a trustee of a trust or an executor of an estate,"^"^ except that the legislative

history and case law indicate that the ERISA standard is intended to be more
stringent."^^ An ERISA fiduciary owes both a duty of loyalty and a duty of care
to the plan and must discharge his duties with respect to the plan solely in the

interest of the participants and beneficiaries."^^ Accordingly, a fiduciary under a

plan is prohibited from dealing with the assets of a plan in his own interest or for
his own account."^^ Furthermore, a fiduciary with respect to a plan shall not "in
his individual or in any other capacity act in any transaction involving the plan

on behalf of a party (or represent a party) whose interests are adverse to the
interest of the plan or the interests of its participants.'"^^

The fiduciary must also act "with the care, skill, prudence, and diligence
under the circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an enterprise

of a like character and with like aims.'"^^ This standard is not of a "prudent lay

39. See I.R.C. § 409(a)(2) (2004).

40. Stabile, supra note 14, at 66.

41. The National Center for Employee Ownership, 401(k) Plans and ESOPs (2002), at

http://www.nceo.org/library/401k.html (last visited Apr. 17, 2005).

42. See In re Ikon Office Solutions Sec. Litig., 191 F.R.D. 457, 462 n.5 (E.D. Pa. 2000)

(suggesting that courts will examine fiduciary duties under a 401(k) plan in the same way as an

ESOP plan); see also infra note 124.

43. 29 U.S.C. § 1104(a)(1)(A) (2000).

44. Ancel, supra note 11, at 8.

45. See Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th Cir. 1983); see also Stabile, supra

note 14, at 71.

46. 29 U.S.C. § 1104(a)(1).

47. Id. § 1106(b)(1).

48. 29 U.S.C. § 1106(b)(2).

49. Id. § 1 104(a)(1)(B). This latter duty applies to the overall management of the plan and

its assets. The central fiduciary duties found in ERISA section 404 are as follows:

[A] fiduciary shall discharge his duties with respect to a plan solely in the interests of



2005] EFFECTUATING RETIREMENT SECURITY 825

person" but rather of a "prudent fiduciary with experience" and thus, if the

fiduciary does not have the knowledge and expertise needed to make a prudent
decision, he has a duty to obtain independent advice.^^ This is an objective

standard focusing on the conduct of the particular fiduciary and consequently "a

pure heart and an empty head are not enough."^ ^ The test for prudence focuses

on whether the fiduciaries, at the time they engage in a transaction, have

"employed the appropriate methods to investigate the merits of the investment

and to structure the investment."^^ Thus, whether or not the investment was

prudent in hindsight is not what counts; rather, the question is whether the

investment was prudent at the time it was made.

The duties under ERISA also apply to inaction taken by a fiduciary who is
aware of, or should be aware of, another person's breach. The fiduciary will be

liable if he (1) knowingly conceals the breach, (2) fails to act prudently and in the

interests of the plan participants and beneficiaries in carrying out his own duties,
thereby enabling the other fiduciary to breach his duty, or (3) discovers the

breach, but fails to exercise reasonable efforts to remedy it.^^ Although courts

have generally required that fiduciaries follow adequate procedures for

investigating decisions affecting the plan by examining the conduct by the person

who made the decision, they are not necessarily required to reevaluate the merits
themselves.

^"^

the participants and beneficiaries and

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

(B) with the care, skill, prudence, and diligence under the circumstances then

prevailing that a prudent man acting in a like capacity and familiar with such

matters would use in the conduct of an enterprise of like character and with

like aims;

(C) by diversifying the investments of the plan so as to minimize the risk of

large losses, unless under the circumstances it is clearly prudent not to do so;

and

(D) in accordance with the documents and instruments governing the plan

insofar as such documents and instruments are consistent with the provisions

of this subchapter. ...

Id. § 1104(a)(l)(A)-(D); but see id. § 1104(a)(2) (providing that "in the case of an eligible

individual account plan, . . . the diversification requirement of paragraph (1)(C) and the prudence

requirement (only to the extent that it requires diversification) of paragraph (1)(B) is not violated

by the acquisition and holding of . . . qualifying employer securities").

50. Howard v. Shay, 100 F.3d 1484, 1490 (9th Cir. 1996).

51. See Keach V. U.S. Trust Co., 240 F. Supp. 2d 840, 845 (CD. 111. 2002) (quoting Donovan

V. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983)).

52. Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir. 1983).

53. 29U.S.C. § 1105(a).

54. See H.R. REP. No. 93-533, at 312-12 (1974), reprinted in 1974 U.S.C.C.A.N. 4639,

4650-5 1 ; Cunningham, 7 16 F.2d at U61-Mazzola, 7 16 F.2d at 1232-33; ArakeHan v. Nat'l W. Life



826 INDIANA LAW REVIEW [Vol. 38:817

If a fiduciary breaches his duty under ERISA, he is personally and
individually liable to make good to the plan any losses resulting from his breach
of fiduciary duty.^^ Co-fiduciaries who have knowledge of, knowingly
participate in, or enable the commitment of a breach of duty by another fiduciary
are jointly and severally liable with the breaching fiduciary.^^ In addition to

financial liability, the court can award a full range of equitable remedies to the
plaintiffs to correct past abuses and to deter future misconduct.^^

B. Determining Fiduciary Status Under ERISA

The first issue that must be addressed in any ERISA lawsuit is whether or not
the defendants are acting as fiduciaries under the plan.^^ A person can become
a fiduciary under ERISA in three ways: (1) being named as the fiduciary in the
instrument establishing the plan;^^ (2) being named as a fiduciary pursuant to a
procedure specified in the plan instrument, e.g., being appointed an investment

manager who has fiduciary duties toward the plan;^^ or (3) falling under the
statutory definition of fiduciary.^^ A person is a fiduciary under the statutory
definition to the extent:

(i) he exercises any discretionary authority or discretionary control

respecting management of such plan or exercises any authority or control
respecting management or disposition of its assets, (ii) he renders
investment advice for a fee or other compensation, direct or indirect,

with respect to any moneys or other property of such plan, or has any
authority or responsibility to do so, or (iii) he has any discretionary

authority or discretionary responsibility in the administration of such

Ins. Co., 680 F. Supp. 400, 405-06 (D.D.C. 1987).

55. 29U.S.C. § 1109(a).

56. Id. § 1105(a).

57. /<i. § 1 1 32(a)(5). Furthermore, courts have held that these remedies are not precluded by

other federal statutes. For example, there maybe instances when ERISA claims and securities-fraud

claims, which are governed by the Private Securities Litigation Reform Act (PSLRA), overlap. In

Vivien v. Worldcom, Inc., No. C 02-01329 WHA, 2002 WL 31640557 (N.D. Cal. July 26, 2002),
the court held that it could not dismiss an ERISA claim simply because recovery under ERISA

overlaps with recovery under PSLRA. The conflict between ERISA and federal securities law is

further discussed in Part III.B.3, infra.

58. Hull V. Policy Mgmt. Sys. Corp., No. CIV.A.3:00-778-17, 2001 WL 1836286, at *4
(D.S.C. Feb. 9, 2001).

59. 29 U.S.C. § 1 102(a); see also Glaziers & Glassworkers Union Local No. 252 Annuity
Fund V. Newbridge Sec, Inc., 93 F.3d 1171, 1179 (3rd Cir. 1996); Keach v. U.S. Trust Co., 240

F. Supp. 2d 840, 843 (CD. 111. 2002).

60. 29 U.S.C. § 1 102(a)(2); see also Glaziers & Glassworkers, 93 F.3d at 1 179; Keach, 240
F. Supp. 2d at 843.

61. 29 U.S.C. § l002(2l)(Ay,seealsoGlaziers&Glassworkers,93F.3d2itll79;Keach,240

F. Supp. 2d at 843.



2005] EFFECTUATING RETIREMENT SECURITY 827

plan
62

Consequently, under the above definitions, an individual may be a fiduciary
with respect to some of his actions, but not others, and therefore will only be
subject to liability for those portions of a plan over which he exercises discretion

or control.^^

Effectively, a fiduciary is either someone who is designated as a fiduciary or
administrator ("named fiduciary") either directly under the plan document or by

way of a procedure outlined in the plan, such as through appointment,^'* or
someone who undertakes a fiduciary function, but who has not been named in the
plan document or appointed to carry out that function ("functional fiduciaries").^^

Fiduciary status is fairly straight forward when someone is a named fiduciary, for
example, when dealing with a plan administrator.^^ As defined by ERISA, the
term "administrator" is the person designated by the terms of the plan document,

and if no administrator is named, then the administrator is the person acting as

the plan sponsor, such as the employer.^^ The ERISA plan administrator is
always a fiduciary, and thus can be made personally liable for plan losses to the
extent that he has authority to act, and either acts negligently or fails to act when
doing so would be prudent.^^ Furthermore, the plan documents can also
designate persons as fiduciaries for specific purposes.^^ For example, a plan

committee member can be designated for the purpose of overseeing investment
strategies and thus will have fiduciary obligations with respect to those

responsibilities.
^°

62. 29U.S.C. § 1002(21)(A).

63. Hull, 2001 WL 1836286, at *4 (addressing only the issue of whether the defendants
breached their fiduciary duties with respect to the portions of the plan for which they exercised

discretionary control); see Crowley ex rel. Coming, Inc. Inv. Plan v. Coming, Inc., 234 F. Supp.

2d 222, 229 (W.D.N.Y. 2002); Schultz v. Texaco, Inc., 127 F. Supp. 2d 443, 451-52 (S.D.N.Y.

2001).

64. A "named fiduciary" is one "who is named in the plan instrument, or who, pursuant to
a procedure specified in the plan, is identified as a fiduciary ... by a person who is an employer or

employee organization," by an employer and employee organization acting jointly with respect to

the plan. 29 U.S.C. § 1102(a)(2).

65

.

Fred Reish & Joe Faucher, Who Are the Investment Fiduciariesfor a 401(k) Plan ? (Part
1), J. Pension Benefits, Autumn 2000, available at http://www.reish.com/publications/article_

detail.cfm?ARTICLEID=272.

66. Fred Reish & Debra Davis, Reish Luftman Reicher & Cohen, The DOL's Enron Brief:
What It Meansfor 401(k) Investments, Apr. 2003, at http://www.reish.com/publications/article_

detail.cfm?ARTICLEID=393

.

67. 29 U.S.C. § 1002(16)(A).

68. C. Frederick Reish & Joseph C. Faucher, Reish Luftman Reicher & Cohen, What's in a
Name?—Director and Officer Liability Under ERISA, July 1998, at http://www.reish.com/
publications/article_detail.cfm?ARTICLEID=39.

69. Id.

70. Id.



828 INDIANA LAW REVIEW [Vol. 38:817

III. ERISA AS It Applies to Dipiectors' Involvement with 401(k) Plans

A. General Fiduciary Status ofa Director

ERISA expressly contemplates that an officer, employee, or other
representative of a company may serve as a fiduciary of a plan.^^ In a typical
situation, the board of directors (or the employer, if not a corporation) will

establish an ERISA plan and is therefore the initial fiduciary.^^ In some cases the
employer, board members, or officers retain some or all the management and
administrative duties outlined in the plan document, in which case they will have
fiduciary duties with respect to those responsibilities.^^ Directors who are named
fiduciaries under the plan document, or are appointed by procedures in the plan,
should be aware that they have fiduciary duties and should be on notice as to

what those fiduciary duties entail. For example, in In re McKesson HBOC, Inc.
ERISA Litigation,^'^ the court found that because the plan document provided that
the Compensation Committee had responsibility for determining the investment

policy of the plan, and since the Committee was comprised of the Board of
Directors, all directors were proper defendants for breach of fiduciary duty

claims involving 401(k) plan losses.
^^

Nevertheless, the more typical, but more complex, situation is where a
director is not a named fiduciary, but rather a functional fiduciary.^^
Unfortunately, liability regarding breach of fiduciary liability by a functional

fiduciary is more ambiguous than that of a named fiduciary since such a
determination is based on actual authority or power demonstrated instead of
formal title and duties. ^^ Usually, as functional fiduciaries, directors appoint

individuals or committees to be responsible for choosing investment options and

managing and administering the plan,^^ and are not themselves responsible for the

71. 29U.S.C. § 1108(c)(3).

72. Fiduciary Responsibilityfor 401 (k) Plans, BENEFIT INSIGHTS, June 2002, at http://www.

jdb401k.com/bulletins/bi2002_06.htm.

73. Id.

74. No. COO-20030, 2002 WL 31431588 (N.D. Cal. Sept. 30, 2002).
75. Mat*10.

76. See Rankin v. Rots, 278 F. Supp. 2d 853, 871 (E.D. Mich. 2003) (holding that the

defendants' argument that they were not fiduciaries because they were not named as the Plan

Administrator "misses the mark." Since the complaint alleged that the directors exercised

discretionary authority with respect to the Plan, if proven, the directors would be ERISA

fiduciaries); see also Reish & Faucher, supra note 65.
This Note focuses primarily on director functional fiduciary roles within a corporation, not

only because this is the more typical situation when discussing director liability for mismanagement

of401 (k) plans, but also because fiduciary status of a functional fiduciary is not as clearly defined

and causes more confusion.

77. See In re Enron Corp. Sec, Derivative & "ERISA" Litig., 284 F. Supp. 2d 5 1 1, 659-60
(S.D. Tex. 2003).

78. See id. (according to the relevant terms of the Savings Plan, Enron had exercised the



2005] EFFECTUATING RETIREMENT SECURITY 829

selection ofthe 401(k) investments.^^ Those appointed will then become named
fiduciaries under the plan and, like all named fiduciaries, must perform their
duties under the "prudent expert" standard.

^^

In situations where the board appoints committee members to manage and
administer the plan, the board members will be fiduciaries to the extent that they
retain any discretionary authority or control over the plan.^' With regard to

fiduciary duties of the board of directors, the Department of Labor (DOL), the

government agency charged with interpreting and enforcing the provisions of

Title I of ERISA,^^ stated:

Members of the board of directors of an employer which maintains an
employee benefit plan^^ will be fiduciaries only to the extent that they

have responsibility for the functions described in section 3(21)(A) ofthe

Act [ERISA]. For example, the board ofdirectors may be responsible
for the selection and retention ofplan fiduciaries. In such a case,
members ofthe board ofdirectors exercise 'discretionary authority or
discretionary control respecting management ofsuch plan' and are,
therefore, fiduciaries with respect to the plan. However, their

responsibility, and, consequently, their liability, is limited to the

selection and retention of fiduciaries (apart from co-fiduciary liability
\ 84

power of appointment, which, as a corporation, it necessarily did through its Board of Directors).

The Savings Plan in Enron was a 401(k) plan that permitted participants to "invest their deferrals

among an array of investment funds." Marianne W. Culver, Current Issues in Employee Benefits

Litigation, 697 PRACTICING L. iNST. LiTiG. & ADMIN. Prac. Course Handbook Series: Litig.,
839, 884 (2003). One of these funds was an Enron stock fiind. Enron's matching contributions

under the plan were made primarily in Enron stock as an ESOP. Id. at 884-85.

79. Fiduciary Responsibilityfor 401 (k) Plans, supra note 72; see e.g., Enron Corp. , 284 F.

Supp. 2d at 659; Crowley ex rel. Coming, Inc. Inv. Plan. v. Coming, Inc., 234 F. Supp. 2d 222, 229

(W.D.N.Y. 2002); Hull v. Policy Mgmt. Sys. Corp., No. CIV. A. 3:00-778-17, 2001 WL 183686,
at *6 (D.S.C. Feb. 9, 2001).

80. Fiduciary Responsibilityfor 401 (k) Plans, supra note 72.

81. See, e.g., Yeseta v. Baima, 837 F.2d 380, 384-85 (9th Cir. 1988); Leigh v. Engle, 727

F.2d 1 13, 134-35 (7th Cir. 1984); see also Fred Reish & Bmce Ashton, Reish Luftman Reicher &
Cohen, Who Are the Investment Fiduciaries for Your Company's 401 (k) Plan? (Part II) (Aug.

2002), at http://www.reish.com/publications/article_detail.cfm?ARTICLEID=241

.

82. See 29 U.S.C. § 1 135 (2000); see also Plaintiff's Complaint, Enron Corp., 284 F. Supp.

2d659(S.D. Tex. 2003)(No.CIV.A.H01-3913) [hereinafter DOLComplaint] (Secretary ofDOL's

Complaint), available at http://www.dol.gov/_sec/media/announcements/lawsuit.pdf Although

the DOL's regulations do not have the force of law, courts should give deference to the DOL's

reasonable interpretations. Chevron, U.S.A., Inc. v. Natural Res. Def Council, Inc., 467 U.S. 837,

842-45 (1984).

83. According to ERISA, an "'employee benefit plan' or 'plan' means an employee welfare

benefit plan or employee pension benefit plan or a plan which is both an employee welfare benefit

plan and an employee pension benefit plan." 29 U.S.C.A.; § 1002(3).

84. 29 C.F.R. § 2509.75-8 (2004) (emphasis added); see also Landry v. Air Line Pilots Ass'n



830 INDIANA LAW REVIEW [Vol. 38:817

The DOL reiterated this stance on directors' fiduciary status in its Enron brief
opposing the defendants' motions to dismiss, arguing that directors who had the
power to appoint, retain, and remove members ofthe Administrative Committee
had discretionary authority over the management or administration of a plan
under ERISA, and were therefore fiduciaries with respect to those obligations.^^
The U.S. District Judge Melinda Harmon in Houston agreed with the DOL and
denied Enron's motions to dismiss.^^ If the board of directors is given the

responsibility to appoint officers or committee members to oversee the
administration and investment of the plan, they will not only be obligated to

exercise prudence in appointing qualified members, but will also be obligated to
"take prudent and reasonable action to determine whether the administrators [are]
fulfilling their fiduciary obligations,"^^ by regularly monitoring their
performance.^^ However, aside from appointing and monitoring obligations, if
the board members act in any other capacity with respect to the plan, such as
advising plan participants of various investment options, they will likely be

subject to further fiduciary duties with regard to those actions.
^^

The broad definition of fiduciary status found under ERISA provides for
various circumstances in which directors are fiduciaries with respect to a 401(k)

plan, and thereby subject to the high standard of loyalty and care required of an

ERISA fiduciary. Accordingly, it is imperative that directors realize when they
are acting in such a position, particularly when acting as functional fiduciaries,
so that they can establish procedures and guidelines to protect themselves from

potential liability. Although the law is currently unsettled with regard to

directors' liability for mismanagement of 401 (k) plans, it is likely that with the
recent upsurge in high-publicity cases involving employees who have lost their
retirement due to corporate scandals, courts will further expand fiduciary status

and fiduciary duties under ERISA. In fact, the DOL's heavy-handed briefagainst
Enron's corporate defendants should send a warning signal to board members
that any involvement with a 401(k) plan resulting in losses to employees may
subject them to liability under ERISA.

Int'l AFL-CIO, 901 F.2d 404, 417 (5th Cir. 1990) (holding that members ofthe board ofdirectors

ofan employer that maintains an employee benefit plan will be viewed as fiduciaries for only those

functions listed in ERISA § 3(21)(A) for which they exercise discretionary control or authority,

such as the selection and retention of plan fiduciaries).

85. Amended Brief of the Secretary of Labor as Amicus Curiae Opposing the Motions to

Dismiss, at 9-10, Enron Corp., 284 F. Supp. 2d 659 (S.D. Tex. 2003) (No. CIV.A.H-01-3913)

[hereinafter Amended Brief of the Secretary of Labor], available at WL 32157092.
86. Enron Corp., 284 F. Supp. 2d at 5 1 1

.

87. Leigh v. Engle, 727 F.2d 1 13, 135 (7th Cir. 1984).

88. Fred Reish & Gail Reish, Fiduciary Responsibilities for Managing 401 (k) Plans and
Their Investments, The PENSION ACTUARY, May-June 2001, flva/7aZ)/ea?http://www.unifiedtrust.

com/Fiduciary_Responsibilities_for_Managing_ERISA_Investments. pdf

89. See, e.g., Leigh, 111 F.2d at 136; Arden Dale, Fund Probe Highlights Shifting Ground

for Fiduciaries, Dow JONES NEWS SERVICE, Nov. 14, 2003.



2005] EFFECTUATING RETIREMENT SECURITY 83

1

However, rather than deterring directors from offering 401(k) plans in the

future, cases such as Enron should provide directors with foresight into potential

liability, thereby enabling them to put into place adequate cost-effective

procedures that will shield the directors from personal liability, and at the same

time, help prevent plan losses in the first instance. The next sections outline
various situations in which directors are likely to be held liable with respect to

employees' suits arising out of401 (k) losses and possible preventative measures

that directors can take to avoid such potential liability.

B. Situations Involving Potential Liabilityfor a Director Acting

as a Fiduciary

Informing directors of their potential liability regarding their involvement

with 401(k) assets is essential to the financial security of American retirees in

two ways: 1) directors will have an incentive to put into place preventative

measures to safeguard plan assets, thereby decreasing the likelihood that they

will face liability; and 2) by decreasing their potential liability, directors will be
more willing to continue to offer 401(k) plans in the future (assuming that the
costs for the necessary preventative measures do not outweigh the benefits to

employers who voluntarily offer such plans).
L De Facto Control over Investment Options.—One of the most obvious

ways that a director can become subject to liability for mismanagement of plan
assets is to exercise de facto control over the plan options. Although the director

is not named in the plan to carry out such functions, the court will look beyond
the plan's terms to identify who is actually exercising discretionary control,
either directly or indirectly, over the management plan assets. ^^

In Leigh v. Engle, the court was faced with the issue ofde facto control under
ERISA concerning two defendants, Libco Corporation and Clyde Engle.^^
Defendant Libco Corporation was a holding company that acquired one hundred
percent of the common stock of Reliable Manufacturing and consequently was
responsible for appointing the directors of that company. Defendant Engle had

a controlling interest in Libco and was a director ofReliable Manufacturing, thus

90. 29 U.S.C. § 1 002(2 1 )(A) (2000) ("[A] person is a fiduciary with respect to a plan to the

extent ... he exercises any discretionary authority or discretionary control respecting management

ofsuch plan or exercises any authority or control respecting management or disposition ofits assets

. . . .") (emphasis added).

9 1

.

Leigh, 121 F.2d at 11 3 . The type ofretirement plan at issue in Leigh was a profit-sharing

trust, as opposed to a 401(k) plan. M at 1 15. A profit-sharing trust is a plan where the employer
uses a portion ofthe profits of the company in a trust fund for eventual distribution to employees

upon some specified events, such as death, disability, termination, or attainment of a specified

retirement age. See James T. Tilton & Janice R. Moore, Non-Qualified Deferred Compensation:
Postponing Taxation While Securing the Benefit, 275 PLI/Tax 283, 326-28 (1988). Nevertheless,

the same ERISA provisions would apply to a director who exercises de facto control over a 401(k)

plan. See supra Part I.



832 INDIANA LAW REVIEW [Vol. 38:817

responsible for appointing the plan administrators.^^ The district court found that
Libco and Engle were not fiduciaries with respect to the investment because
plaintiffs failed to show that they exercised direct control over investment
options.^^ The court ofappeals was more skeptical. Although on paper, Engle's
and Libco 's authority over the plan could be exercised only indirectly through

appointment power, the court found that, "ERISA directs courts to look beyond
Engle and Libco's formal authority with respect to the plan, limited to selection

and retention ofadministrators, and to consider what real authority they had over
plan investments."^"^ Through their selection of appointees, Dardick and
Zuckerman, Engle and Libco "presumably obtained substantial de facto control

over plan investment decisions."^^ Dardick was Engle 's personal attorney and
general counsel to Engle's various businesses and, consequently, most of

Dardick' s income came from an entity controlled by Engle. Furthermore,
Dardick was assisting Engle and Libco in the acquisition ofthe three companies
for which the plan administrators were investing plan assets.

^^

Zuckerman, on the other hand, was a paid member ofthe Libco board and an
investment consultant to Libco; thus, he was ultimately hired by Engle.^^ He was
also the president of Reliable Manufacturing and member of its board, and,
therefore, he too had substantial interest in the outcome ofthe acquisition efforts

that was congruent with Engle's and Libco's.^^
Ultimately, the court of appeals found that the plaintiffs failed to show that

the district court clearly erred in finding that the defendants did not exercise

authority over the trust's investments, but then proceeded to hold the defendants

liable for their involvement in the plan in various other capacities.^^

Nevertheless, this is a situation where the court could have found de facto control

by a director, and would have likely done so if the standard was not clearly
erroneous and had there not been another avenue to hold Engle liable. This was
a situation where Engle appointed plan administrators who he had significant
control over and who had similar goals to his own and therefore would effectuate
those goals through the administrator's authority to invest plan assets. Directors

who put themselves in that position should be on notice that they will likely be
subject to fiduciary liability arising out of the mismanagement of plan assets.

92. Leigh, 111 F.2d at 116-17, 135.

93. Id. at 135.

94. Id. (emphasis added). But see Crowley ex rel. Coming, Inc. Inv. Plan v. Coming, Inc.,

234 F. Supp. 2d 222, 229 (W.D.N.Y. 2002) (finding that the "only power the Board had under the

Plan was to appoint, retain, or remove members ofthe Committee[ and t]hus, the Board's fiduciary

obligations can extend only as to those acts") (citation omitted).

95. le/g/?, 727 F.2d at 135.

96. Id

97. Matin.
98. Id at 135.

99. Leigh v. Engle, 858 F.2d 36 1 , 364 (7th Cir. 1 988); see infra text accompany notes 1 1
5-

16.



2005] EFFECTUATING RETIREMENT SECURITY 833

A similar situation occurred in Reach v. U.S. Trust Co.,^^^ but here, the court
found, based upon the court's language in Leigh, that the directors were

exercising de facto control over the plan assets by appointing a specific trustee

to effect a stock purchase transaction and therefore had relatively extensive

fiduciary duties. Defendant Thomas Foster, chairman of the board of directors,
and Defendant Melvyn Regal, vice chairman of the board of directors, were not
named fiduciaries of the plan, but they both actively selected U.S. Trust as the
trustee for the Plan. Consequently, the court looked beyond the limited duty of

selection and retention of the plan administrators to determine if Foster or Regal

had actual authority over the plan's investments. ^^^ The court found that the
directors had appointed U.S. Trust as trustee to replace the former trustee

"apparently with the sole purpose of effectuating the stock purchase

transaction," ^^^ as Regal testified in his deposition that there would have been no

need to appoint a trustee if the transaction was not going to take place.
^^^

Accordingly, the court held:

[T]he selection ofU.S. Trust as trustee for the ESOP was so inextricably
intertwined with the desired end of effectuating the stock purchase

transaction that the act of appointing the trustee essentially exercised de

facto control over the plans [sic] assets and management. Thus, the

particular facts ofthis case make it readily distinguishable from the cases
cited by Foster and Regal, as their actions clearly constituted the

"something more" than the mere holding of a corporate office or

appointment power found to be insufficient to bestow fiduciary status
over the distribution of plan assets in those cases.

^^"^

The findings in Leigh and Reach should not be surprising. Under ERISA, if
a director is exercising actual control over plan assets, directly or indirectly, he

will be held to the high standards of fiduciary duty outlined in ERISA. Directors
cannot shield themselves from liability by appointing someone else to do what
they want done. As a result, unless directors can meet the fiduciary obligations
under ERISA for management and investment of plan assets, ^^^ they should

100. 234 F. Supp. 2d 872 (CD. 111. 2002). This case did not involve a 401(k), but rather an

ESOP. However, like Leigh, the court's reasoning with respect to ERISA fiduciary duties would

be analogous to 401(k) plan as the ERISA provisions are the same under both pleins. See supra text

accompanying note 42.

101. /i:eflc/z, 234 F. Supp. 2d at 881-82.

102. /J. at 882.

103. Id.

104. M. at 882-83.

105. See ERISA § 404(a), 29 U.S.C. § 1104(a) (2000) and ERISA § 406(b), 29 U.S.C. §
1 106(b). For example, under ERISA section 406(b)(1), the "selection of a person to manage the

investment of plan funds constitutes dealing with plan assets, if such a delegation were made in a

manner which operates in a plan fiduciary's own interest or for its own account, the delegation of

investment management authority would be . . . prohibited . . . ." Op. F-3867 A, 1992 ERISA

LEXIS 38, at *10 (Dep't of Labor, Pension & Welfare Benefit Programs, Jan. 17, 1992).



834 INDIANA LAW REVffiW [Vol. 38:817

refrain from appointing plan administrators over whom they exercise significant
control. Furthermore, when directors place themselves in such a situation, the
court should construe their fiduciary obligations strictly so as to ensure that

directors will not have an incentive to mismanage plan assets for their own
benefit. ERISA was enacted to prevent just this sort of behavior by plan
fiduciaries. Therefore, a hard-line approach against directors who knowingly
violate their fiduciary obligations at the expense of employees' retirement

security will most effectively assure that the goals of ERISA are realized.
To prevent litigation based on the allegation of de facto control, the board

members should appoint only independent plan administrators who are free from
any conflicts of interest concerning plan investments. The less intertwining the
board members have with plan administrators, the less likely they will be subject
to liability based upon de facto control, and the more likely plan assets will be
properly invested.

2. Appointing and Monitoring Plan Administrators.—Typically, the board
members, either through the plan documents or simply by way of normal
business operations, will have a duty to appoint 401(k) plan fiduciaries and to

periodically review their performance. ^^^ Consequently, a director will likely

first be subject to fiduciary duties when deciding who to appoint as plan
fiduciaries.'^^ In Martin v. Marline, ^^^ the plan document, like many plan
documents, gave the board of directors the responsibility of appointing

106. See Reish & Ashton, supra note 81.
1 07. Is it well-settled that the act of appointing plan adniinistrators is a fiduciary function and

thereby confers fiduciary status. See Liss v. Smith, 991 F. Supp. 278, 310 (S.D.N.Y. 1998).

However, in In re WorldCom, Inc., 263 F. Supp. 2d 745, 760 (S.D.N.Y. 2003), the court found that

plaintiffs arguments that the directors were ERISA fiduciaries merely because of their power to

appoint and remove individuals as plan administrators or investment fiduciaries was going too fai".

The DOL, in its brief filed on January 19, 2004, opposed the view taken by the court, arguing that

ERISA imposes an obligation on those who appoint plan fiduciaries to monitor and oversee their

decisions, as they are also fiduciaries under the plan. See News Briefs: Labor Department Backs

Suit Against WorldCom, PENSIONS & INVESTMENTS, Jan. 26, 2004, at 50, available at 2004 WL
65596562. The Enron court agreed with the DOL, finding that the power to appoint and remove

individuals does confer fiduciary status. The court distinguished WorldCom by noting that

"WorldCorh did not appoint anyone as a fiduciary and there apparently were no allegations that

Director Defendants functioned as fiduciaries, i.e., actually appointed persons to or removed

persons from such positions." In re Enron Corp. Sec, Derivative & "ERISA" Litig., 284 F. Supp.
2d 511, 553 n.59 (S.D. Tex. 2003) (emphasis in original).

Consequently, when a director is given the role of appointment, either under the plan or

through his position in the company, he becomes a fiduciary under the plan and must discharge

those duties in a prudent manner. See ERISA § 404(a), 29 U.S.C. § 1 104(a).

108. 15 Employee Benefits Cas. 1138, No. 87-NC-115J, 1992 U.S. Dist. LEXIS 8778 (D.

Utah Mar. 30, 1992). The Plan document in this case was an ESOP; however, the analysis with

regard to fiduciary obligations under ERISA for appointment of plan fiduciaries will be analogous

to 401(k) plans. See supra text accompanying note 42.



2005] EFFECTUATING RETIREMENT SECURITY 835

fiduciaries to carry out the management of the plan assets. ^^^ In fulfilUng this
obHgation, the board members have a duty to prudently appoint qualified plan
fiduciaries. If directors appoint unqualified plan fiduciaries

who are untutored and inexperienced in the operations of [the Plan] and
the investment of its assets [they] owe a special duty to the Plan to
ensure that the appointed fiduciary clearly understands his obligations,

that he has at his disposal the appropriate tools to perform his duties with

integrity and competence, and that he is appropriately using those

tools.
*^'

To avoid a special duty and increased potential liability for appointing untutored
and inexperienced plan participants, directors should appoint experienced

committee members who are skilled in investing and who can prudently select
a team of advisors to assist in devising investment altematives.^^^

Furthermore, directors' duties do not end after appointment of plan

committee members. Directors are also subject to ERISA fiduciary obligations
to the extent that they have responsibility for oversight or retention of plan

administrators. ^^^ Since ERISA recognizes that a person may be subject to
fiduciary obligations for some purposes and not others, directors can be liable for
failure to monitor and oversee plan committee members, even if they are not

found liable with respect to the administrators' investment decisions.
^^^

Thus,

109. Marline, 1992 U.S. Dist. Lexis 8778 at *3.

1 10. Id. at *29. The duty to use reasonable care in selecting and instructing a qualified person

to delegate responsibility for plan assets is analogous to that of a trustee. Id. at *29-30.

111. Reish & Faucher, supra note 65.
1 12. See Martin v. Schwab, 15 Employee Benefits Cas. 2135, No. CIV.A.91-5059-CVSW-1,

1992 WL 296531, at *4 (W.D. Mo. Aug. 11, 1992); see also In re Elec. Data Sys. Corp., "ERISA"
Litig., 303 F. Supp. 2d 658, 671 (E.D. Tex. 2004) (finding that ERISA law imposes a duty on

fiduciaries with appointment power to monitor appointees); Rankin v. Rots, 278 F. Supp. 2d 853,

871 (E.D. Mich. 2003) (stating that the directors delegated discretionary authority with respect to

the plan and therefore had a duty to monitor the decision of those to whom authority had been
delegated).

113. Leigh v. Engle, 727 F.2d 1 13, 134-35 (7th Cir. 1984) (holding that Engle and Libco had

a duty to appropriately monitor the administrators' actions). The duty to properly monitor and

oversee plan fiduciaries can be found in ERISA sections 404 and 405(a). Under ERISA section

404(a), 29 U.S.C. § 1 104(a), a fiduciary is required to discharge his fiduciary duties with care, skill,

prudence, and diligence. Under ERISA section 405(a), 29 U.S.C. § 1105(a), a fiduciary is

responsible for his co-fiduciaries' breaches:

(1) if he participates knowingly in ... an act or omission of such other fiduciary . . .;

(2) if, by his failure to comply with section 404(a)(1) ... in the administration of his

specific responsibilities which give rise to his status as a fiduciary, he has enabled such

other fiduciary to commit a breach; or

(3) if he has knowledge of a breach by such other fiduciary, unless he makes reasonable

efforts under the circumstances to remedy the breach.

Some courts have distinguished section 404(a) from section 405(a) by describing section 405(a)



836 INDIANA LAW REVIEW [Vol. 38:817

directors cannot abdicate their duties by merely giving over the day-to-day
operations ofthe plan investments to even qualified appointees. Rather, directors

have a continuing duty to "act with an appropriate prudence and reasonableness

in overseeing" the plan administrators' management of the plan.^^"^ In Leigh, the

more specifically as "co-fiduciary liability," where a fiduciary has knowledge of another

fiduciaries' breach, but fails to do anything to correct it. However, when analyzing directors' duties

after appointment, section 405(a) is essentially a failure of oversight responsibility—allowing
another fiduciary to breach his duties without taking any corrective actions. It makes little sense

to analyze section 404(a) and section 405(a) differently, since section 405(a) includes breaches

under section 404(a). Nevertheless, some courts require more to show co-fiduciary liability, such

as actual knowledge. See Keach v. U.S. Trust Co., 240 F. Supp. 2d 840, 844 (CD. 111. 2002)

(finding that co-fiduciary liability under section 405(a) requires "actual knowledge" of the breach);

see also Donovan v. Cunningham, 716 F.2d 1455, 1475 (5th Cir. 1983) (for same proposition).

Consequently, any fiduciary who becomes aware that a co-fiduciary has breached his fiduciary

duty may not avoid liability by simply ignoring the breach and hiding his head in the sand. See

Jackson v. Truck Drivers' Union Local 42 Health & Welfare Fund, 933 F. Supp. 1 124, 1 141 (D.
Mass. 1996). In its brief in opposition to the motions to dismiss in Enron, the DOL argued that
even if the "[c]ourt were to find that [certain defendants] were not liable under § 404 ... the Court

could find these defendants liable under § 405 . . ., if their actions enabled other fiduciaries to

breach their duties." Amended Brief of the Secretary of Labor, supra note 85, at 14. A fiduciary
who breaches section 405 is jointly and severally liable with the breaching fiduciary. ERISA

section 405(a), 29 U.S.C. § 1105(a) (2000).

114. L^ig/i, 727 F.2d at 135; 5^ea/5o Newton V. Van Otterloo, 756 F. Supp. 1121, 1132 (N.D.

Ind. 1991) (finding that the power to appoint and remove plan fiduciaries makes board members

fiduciaries, thus requiring adherence to the standards ofERISA section 404, and additionally entails

the duty to appropriately monitor the administrator^' actions). However, in Crowley ex rel.

Coming, Inc. Investment Plan v. Coming, Inc., 234 F. Supp. 2d 222 (W.D.N.Y. 2002), the court

did not place any significance on the directors' duty of oversight and retention of plan fiduciaries,

and instead focused on the directors' duties outlined in the plan document. Coming, 234 F. Supp.

2d at 222. The complaint in Coming alleged that defendants had breached their fiduciary duties

by continuing to offer company stock as an investment alternative, by over-allocating company

stock in the plan, and by making material misrepresentations and failing to disclose crucial

information regarding the stock; thereby causing losses to the plan. Id. at 227. The court found that

the board of directors held fiduciary duties only with respect to those powers specifically defined

under the plan document, which consisted of appointing, retaining, or removing members of the

Committee. Id. at 229. Nevertheless, the court found that since plaindffs made no allegafion that

the directors breached any fiduciary duty when it appointed members of the Committee, and since,

under the plan, the directors were not responsible for investment opfions or management of plan

assets, the complaint failed to state a claim against the directors. Id. at 229-30. It appears that the

court in Crowley did not recognize directors' duty to monitor after appointment. Arguably,

however, this omission may have been a result of plaintiff s failure to state a claim with respect to

monitoring and oversight responsibilifies. The court is unclear regarding this issue. See also Hull

V. Policy Mgmt. Sys. Corp., No. CIV.A.3:00-778-17, 2001 WL 1836286, at *7 (D.S.C. Feb. 9,
2001) ("Assuming the Board's right to remove Committee members might be stretched to include

a duty of supervision . . . there are simply no allegations in the complaint adequate to support a



2005] EFFECTUATING RETIREMENT SECURITY 837

court held that although Engle, the director responsible for appointing and

removing the trust administrators, was not obligated to examine every action

taken by Dardick and Zuckerman, the plan administrators, in light of their

knowledge that the administrators were faced with conflicting loyalties with

respect to plan investments, the directors were obligated to take prudent and

reasonable action to ensure that the administrators were fulfilling their fiduciary

responsibilities.^*^ The administrators in Leigh breached their fiduciary duties
when they made investment decisions based not on the best interests of the plan
participants, but out of personal motivations. The trial court found that Engle
was aware of the administrators' breach, but failed to do anything to rectify the

situation. By not doing so, Engle failed to meet his fiduciary duties under
ERISA.

**^

In Martin v. Marline, the CBI board of directors was given the responsibility
under the Plan Document to "periodically review performance of Fiduciaries to
whom any allocation or delegation of duties has been made by the Board of
Directors."**^ The directors, including Harline, were placed on notice, or
reasonably should have been placed on notice, by several different entities,

concerning the imprudent investments being made by the plan administrators,
Nuffer and Harris.**^ Particularly, the Federal Reserve Bank of San Francisco
sent the CBI Board of Directors a Report of Inspection strongly recommending
that the board have qualified external appraisers take independent valuations of

company stock and citing a number of possible violations of ERISA in
connection with management and administration ofthe plan. * *^ Nevertheless, the
board members failed to take the recommended action. The court held that the
Board of Directors:

claim for failure to supervise the Committee."). In any case, the court in Coming interpreted the

directors' fiduciary responsibilities far more narrowly than did the DOL in its complaint and motion
in opposition of dismissal in the Enron litigation, which opposition the Enron court later upheld.

See Roger C. Siske & Michael R. Maryn, ESOPs: A Case Study, SJ013 ALI-ABA 519, 559 (2003).
115. Leigh, 727 F.2d at 136 (remanding to determine if the directors had violated their

fiduciary duty of oversight; however, the court noted that "[n]othing in the record" demonstrated

that the corporation's board or its chairman "took steps either to insure that [the plan

administrators] were fulfilling their fiduciary obligations or to remedy any violations which might

have already occurred"); see also In re Unisys Sav. Plan Litig., 74 F.3d 420, 435 (3d Cir. 1996)

(finding that fiduciaries do not need to duplicate their advisers' investigative efforts, but they do

have a duty to review their advisers' data, to determine its significance, and supplement the

information if needed; merely accepting advisers' findings without more, is not sufficient).

116. Leigh v. Engle, 858 F.2d 361, 364 (7th Cir. 1988). Essentially, the court's ruling falls

under ERISA section 405(a), 29 U.S.C. § 1 105(a), by finding that the corporation and its chairman

knew of, yet chose to ignore, improper investment decisions.

1 17. Martin v. Harline, 15 Employee Benefits Cas. 1 138, No. 87-NC-l 15J, 1992 U.S. Dist.

LEXIS 8778, at *3 (D.C. Utah Mar. 30, 1992).

118. Id.atm-23.

119. Mat*20-23.



838 INDIANA LAW REVIEW [Vol. 38:817

[I]mprudently permitted Nuffer and Harris to continue to purchase shares

of CBI with Plan assets when they knew or through the exercise of
reasonable diligence should have known that the prices paid for the
shares acquired were not determined by a qualified contemporaneous
valuation and were in excess of the fair market value of such shares; and

imprudently failed to remove Nuffer or take the appropriate steps to
prevent Nuffer from continuing to violate ERISA . . . .^^°

Additionally the court found that permitting Harris to supervise the Plan

fiduciaries was imprudent under ERISA section 404(a)(l)(B),^^^ 29 U.S.C. §
1104(a)(1)(B), given the deteriorating condition of the company and the
participation by Harris in insider transactions involving the Plan.^^^ Under these
circumstances, the directors violated their duty to appropriately monitor and

review the plan fiduciaries and, therefore, the directors were subject to personal

liability for the plan losses.
^^^

DOL took a similar stance in their complaint against Enron's board of
directors and officers, Lay and Skilling, who were responsible for appointing,
monitoring, and removing the members of the Plan Administrative Committee.
The DOL argued:

As Enron's stock lost nearly all of its value during 2001, the Plans'
fiduciaries never considered the prudence of the Plans' investment in

Enron stock or took any action to protect the value of the participants'

retirement accounts.
^^"^ As a result of the fiduciaries' total and complete

120. Id. at *27.

12L 5ee text accompanying 5M/?ra note 49.

122. Marline, 1992 U.S. Dist. LEXIS 8778, at *31.

123. The court additionally found that director Harline breached his fiduciary duty under

ERISA section 405, 29 U.S.C. § 1 105, with regard to the actions of Harris and Nuffer, since he had

actual or constructive knowledge of the facts constituting their breaches offiduciary duty and failed

to take reasonable steps to remedy such breaches. Id. at *32; see also text accompanying supra note

113. The fact that Harline was one of several defendants that could have taken action to remedy

the breach did not absolve Harline of responsibility because liability for breaching fiduciary duty

is joint and several
—

"there is no safety in numbers." Harline, 1992 U.S. Dist. LEXIS 8778, at *32

n.l.

124. Enron had three plans: the Enron Corp. Savings Plan, the Enron Corp. Employee Stock

Ownership Plan (ESOP), and the Cash Balance Plan. See Amended Briefofthe Secretary ofLabor,

supra note 85. As the DOL in Enron analyzed all three plans under the same ERISA fiduciary
duties with regard to the specific functions delegated to the various actors within each plan, so too

did the court. In In re Enron Corp. Securities, Derivative & "ERISA " Litigation, 284 F. Supp. 2d
511, 660-61 (S.D. Tex. 2003), the court analyzed the employee savings plan and the ESOP

congruently finding that the allegations that the employer, management committees, officers, and

directors had power to appoint, retain, and remove ERISA plan fiduciaries; that they exercised

discretionary authority of appointment over management or administration of plans, and that they

failed to insure that selected fiduciaries complied with their fiduciary duties, were sufficient



2005] EFFECTUATING RETIREMENT SECURITY 839

inaction, the Plans lost much of their value and thousands ofparticipants
were left with uncertain futures.

*^^

Essentially, the DOL asserted that although Lay and Skilling were not named
fiduciaries relative to the Plans, they were Plan fiduciaries because they

exercised authority over the selection of Administrative Committee members.
^^^

However, according to the DOL, Lay and Skilling breached their fiduciary duties
imposed by ERISA because they failed to monitor the Committee' s performance,
failed to provide the Committee with adverse knowledge about Enron's true

financial condition, of which they were aware, and actively misled participants

about Enron's financial condition despite knowledge of its deteriorating

condition. ^^^ Although the board of directors possessed both public and

nonpublic information that should have put them on notice that the plan
fiduciaries, who they appointed, were not acting with prudence with regard to
plan assets, they failed to take any action to correct the fiduciaries breach of both

the duty of loyalty and duty of care.^^^

Although directors are not obligated to reinvestigate the merits of the plan

committee's decisions, they should establish procedures for conduct and create

a system of reporting and supervision to facilitate monitoring by the board of

directors. ^^^ Directors who have responsibility for appointment are required to
review the performance of the plan appointees at reasonable intervals "in such

manner as may be reasonably expected to ensure that their performance has been
in compliance with the terms of the plan and statutory standards, and satisfies the

needs of the plan."^^^ However, if the terms of the plan are such that following

them would not be in the best interest ofthe participants, an investment fiduciary

evidence to support a claim for breach of fiduciary duties of loyalty and prudence under ERISA.

The Savings Plan, which was a 401(k), permitted the participants to direct that their employee

contributions be invested in one or more of several investment alternatives, one of which included

Enron Stock. Amended Brief of the Secretary of Labor, supra note 85, at 34. Furthermore, as

noted in supra note 42, ESOPs are often analyzed congruently with 401(k) plans, as they are

typically part of the same plan.

125. DOL Complaint, supra note 82, at 4.
126. As asserted earlier, board members commonly appoint plan administrators, and

consequently they would be "functional" fiduciaries with respect to the plan.

127. DOL Complaint, supra note 82, at 26. See the next section for further discussion on
misrepresentations or omissions by directors regarding 401(k) plans.

128. DOL Complaint, supra note 82, at 29.
129. Martin v. Hairline, 15 Employee Benefits Gas. 1 138, No. 87-NC-l 15J, 1992 U.S. Dist.

LEXIS 8778, at *30 (D.C. Utah Mar. 30, 1992). Where appointing fiduciaries do not establish a

procedure to monitor the performance ofthe plan's appointed trustees, they have violated their duty

ofprudence and loyaltyunderERISAsection 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A) (2000). See

Sandoval v. Simmons, 622 F. Supp. 1174, 1215-16 (CD. 111. 1985).

130. 29 C.F.R. § 2509.75-8 (2005); see also Henry v. Frontier Indus., Inc., Nos. 87-3879 and

87-3898, 1988 WL 132577, at *3 (9th Cir. Dec. 1, 1988) (unpublished table decision).



840 INDIANA LAW REVIEW [Vol. 38:817

must disregard the plan.^^^ Because the appointing directors not only have a duty
to monitor the fiduciaries' actions, but also have a duty to monitor the investment

of the plan assets, ^^^ this may entail going outside the terms of the plan if doing
so would be prudent. If the directors discover that the appointees have taken
inappropriate action and have not adequately protected the interests of the plans'

participants and beneficiaries, then the directors have a subsequent duty to take

remedial measures, including possible removal of appointees or perhaps even

withdrawing the plain's investments.
^^^

Leigh, Enron, and Harline all illustrate the importance of procedural

diligence for directors when appointing plan fiduciaries. The first step is to find
qualified appointees who are equipped with the skills and tools to effectively
manage the plan assets. Subsequently, it is equally important that the directors
continue to monitor and oversee the appointed plan fiduciaries to ensure that they

remain qualified to manage the plan investments. While this admittedly places
a burden on directors to effectuate and maintain procedures to ensure effective

management of 401(k) plans, this burden is necessary to maintain employee
retirement plans, specifically 401(k) plans. This burden faced by directors is
likely to continue its ascent as public opinion increasingly shifts in disfavor of

large corporations in light of the recent scandals by corporate defendants for

mismanagement of 401(k) plans. For example, in Enron, the DOL argued for
much broad er fiduciary duties to be placed on directors for their involvement
with 401(k) plans, and, consequently, directors need to be aware of the

possibility of facing increased liability.

Fortunately, the courts in such cases as Leigh and Harline held, and even the

DOL in Enron argued, that liability should be found only in those situations
where the Board should have been on notice that the plan fiduciaries were

breaching their duties under ERISA. ^^"^ In the preceding three cases, the board

131. See Laborers Nat'l Pension Fund v. N. Trust Quantitative Advisers, Inc., 173 F.3d 313,

322 (5th Cir. 1999); Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983); see also

Rankin v. Rots, 278 F. Supp. 2d 853, 878 (E.D. Mich. 2003) ("Contrary to the Outside Directors'

implication, a fiduciary is not required to blindly follow the Plan's requirements. Indeed, 'a

fiduciary must also act "in accordance with the documents and instruments governing the plan,"

insofar as those documents are consistent with the provisions of ERISA.'") (quoting Best v. Cyrus,

310 F.3d 932, 935 (6th Cir. 2002)). But see In re McKesson HBOC, Inc., 29 Employee Benefit

Cas. 1229, 2002 U.S. Dist. LEXIS 19473, at *16-17 (N.D. Cal. Sept. 30, 2002) (finding that the

plan required investment in company stock and was therefore presumptively proper for the

fiduciaries to follow the plan's direction to do so).

132. See Mehling v. N.Y. Life Ins. Co., 163 F. Supp. 2d 502, 509-10 (E.D. Pa. 2001) (finding

that implicit in the power to select the Plans' named fiduciaries was the duty to monitor the

fiduciaries' actions, including their investment of plan assets).

133. See Liss v. Smith, 991 F. Supp. 278, 311 (S.D.N.Y. 1998); see also Whitfield v. Cohen,

682F.Supp. 188, 197(S.D.N.Y. 1988) (recognizing that monitoring fiduciary had a duty to remove

plan assets from investment once it became clear, or should have become clear, that investment was

no longer proper for the Plan).

134. Several courts recognizing the duty to monitor have given the duty a limited scope.



2005] EFFECTUATING RETIREMENT SECURITY 841

members simply failed to observe the information that was immediately obvious.
When it became apparent that plan assets were being invested imprudently, the
directors had a responsibility to take appropriate investigatory steps with regard

to the plan fiduciaries' decision-making. The balance struck by the courts in
Leigh and Marline and the DOL in Enron is one that recognizes the goal of
maintaining effective retirement plans by creating liability for directors only

when they could have prevented loss to the plan by simple oversight and
monitoring procedures, such as taking action once they were put on notice of

imprudent behavior. ^^^ This does not require the board to constantly scrutinize

the actions of the plan fiduciaries, but it does require them to periodically

evaluate the plan investments to determine whether the fiduciaries are using

appropriate methods for choosing investment alternatives. As a result, directors
will be dissuaded from failing to correct mismanagement of 401 (k) plans which

they can reasonably detect, but will not be dissuaded from offering 401(k) plans

as a result of overly burdensome oversight responsibilities.

3. Misrepresentations or Omissions by Directors Regarding 401(k) Plan

Assets.—This section concerns directors' misrepresentations and omissions
regarding 401(k) plan assets as an extension of the duty to monitor. In fact, the

expansive nature of the DOL's argument in Enron is based primarily upon the
directors' failure to properly communicate investment information to plan

participants. ^^^ Therefore, it is highly prudent for directors to recognize the

increasingly expansive nature of fiduciary duties with respect to

misrepresentations and omissions.

The rise oflitigation overERISA fiduciary duties with regard to 401 (k) plans
has often originated with a common complaint—that the plan fiduciaries,
including company directors, made misrepresentations or breached their duty to
disclose material information that directly affected the value ofemployee 401(k)

plans. ^^^ Typically, the allegations are based on either misrepresentations that

employer stock is a good investment, leading employees to invest more heavily
in the company stock, dissuading them from pulling out of the stock, or failure
to disclose information about the company which the plan fiduciaries know will
influence the employees' decisions regarding how much to invest in company
stock, if at all.

^^^

The leading Supreme Court case recognizing individual relief for claims

including the three cases outlined in this Section. See also Coyne & Delany Co. v. Selman, 98 F.3d
1457, 1466 n. 10 (4th Cir. 1 996) ("Courts have properly taken a restrictive view of the scope of this

duty and its attendant potential for liability.").

135. See also Newton v. Van Otterloo, 756 F. Supp. 1121,1 132 (N.D. Ind. 1991) (finding that

directors have duties to monitor plan fiduciaries whom they appoint but do not breach such duties
in the absence of "notice of possible misadventure by their appointees").

136. See infra notes 149-54 and accompanying text.

137. Proceedings, Employee Stock Ownership After Enron: Proceedings ofthe 2003 Annual

Meeting, Association ofAmerican Law Schools Section on Employee Benefits, 1 EMPLOYEE Rts.

& Emp. Pol'y J. 213, 221 (2003).
138. Mat 222.



842 INDIANA LAW REVIEW [Vol. 38:817

based on breach offiduciary duty by misleading plan participants is Varity Corp.
V. HoweP'^ In that case, the district court found that the company intentionally
misled employees when it told them that their benefits would remain the same if
they voluntarily transferred their employment to a separately incorporated
subsidiary.

^"^^ This case is an extreme example of material misrepresentations.
The firm persuaded employees to transfer their stock into a subsidiary company
when the firm knew all along that the subsidiary was in serious financial trouble.
The company did so by repeatedly and publicly assuring the employees of the
plans' integrity. Consequently, the Supreme Court found that the employer/plan
administrator was acting in its fiduciary capacity when it communicated this
information to plan participants because reasonable employees would have
thought that the employer was communicating with them both in its capacity as
employer and as plan administrator and because of the context in which the

statements about benefits were made.*"^^ Since the employer was acting in its
fiduciary capacity when it misled employees, it violated ERISA fiduciary
obUgations.^"^^ The Court held:

ERISA requires a "fiduciary" to "discharge his duties with respect to a
plan solely in the interest of the participants and beneficiaries." To
participate knowingly and significantly in deceiving a plan's

beneficiaries in order to save the employer money at the beneficiaries'
expense is not to act "solely in the interest of the participants and

beneficiaries." As other courts have held, "lying is inconsistent with the
duty of loyalty owed by all fiduciaries and codified in section 404(a)(1)
ofERISA."*^^

The Court in Varity Corp. specifically held that Varity did not act as a fiduciary
simply because it made statements about its expected financial conditions or that
an ordinary business decision had a negative effect on the plan. Rather, Varity

Corp. was found liable because it intentionally connected its statement to the

future benefits of the plan.*"^"^ Accordingly, Varity Corp. established that

misrepresentations relating to non-pension benefit plans can establish fiduciary

liability for those acting within their fiduciary capacity.
^"^^ Because ERISA

139. 516 U.S. 489 (1996).

140. U at 498.
141. W. at 503.

142. /t/. at 506.

143. Id. (citations omitted); see e.g., Pocchia v. NYNEX Corp., 81 F.3d 275, 278 (2d Cir.
1996) (holding that it is "well-settled that plan fiduciaries may not affirmatively mislead plan

participants about changes, effective or under consideration, to employee pension benefit plans");

Fischer v. Phila. Elec. Co., 994 F.2d 130, 135 (3d Cir. 1993) ("[Wjhen a plan administrator speaks,

it must speak truthfully."); Beriin v. Mich. Bell Tel. Co., 858 F.2d 1154, 1163 (6th Cir. 1988)

(finding that a duty of loyalty includes an obligation not to materially mislead plan participants and

beneficiaries).

144. Kanry Co/77., 516 U.S. at 505.

145. Previously, the Court in Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S.



2005] EFFECTUATING RETIREMENT SECURITY 843

defines fiduciary status "functionally," this can make virtually any employee,
including directors, subject to the duty not to mislead. Unfortunately, however,

the Court decided not to reach the issue ofwhether fiduciaries have any fiduciary

duty to disclose truthful information on their own initiative. ^"^^

Some courts have subsequently held that fiduciaries not only have an
affirmative duty not to mislead, but the duty of loyalty imposed by ERISA also
creates a duty to disclose information when silence or inaction is materially
misleading. '"^^ This duty will likely arise in situations where the omission is

134, 140-43 (1985), held that ERISA section 502(a)(2), 29 U.S.C. § 1 132(a)(2), did not provide

a remedy for individual beneficiaries in situations similar to that in Varity Corp. Section 502(a)(2)

states that a civil action may be brought by a participant, beneficiary, or fiduciary for appropriate

relief under ERISA section 409, § 29 U.S.C. 1 109. ERISA § 502(a)(2), 29 U.S.C. § 1 132(a)(2)

(2000). Section 1 109 (a) states:

Any person who is a fiduciary with respect to a plan who breaches any of the

responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall

be personally liable to make good to such plan any losses to the plan resulting fi^om each

such breach . . . and shall be subject to such other equitable or remedial relief as the

court may deem appropriate, including removal of such fiduciary.

29 U.S.C. § 1 109. Consequently, Russell found that ERISA section 409 plainly authorizes relief

only for the plan itself, not individual participants or beneficiaries. Russell, 473 U.S. at 144.

The Court in Varity Corp., recognizing the limitation for damages found in section 409,

granted individual relief for the misrepresentations based on ERISA section 502(a)(3), 29 U.S.C.

§ 1 132 (a)(3). Varity Corp., 516 U.S. at 509-12. Section 502(a)(3) states that a civil action may

be brought in two circumstances:

[B]y a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which

violates any provision ofthis subchapter or the terms ofthe plan, or (B) to obtain other

appropriate equitable relief(i) to redress such violations or (ii) to enforce any provisions

of this subchapter or the terms of the plan.

29 U.S.C. § 1 132(a)(3). Varity Corp. held that this clause operated as a "catchall" provision to

provide for individual relief for breaches of fiduciary duty, but is invoked only in the limited

instances in which other provisions ofERISA do not provide relief Varity Corp., 5 1 6 U.S. at 509-

12. Additionally, section 502(a)(3) is limited to equitable relief Id The Court in Mertens v.

Hewitt Associates, 508 U.S. 248, 256 (1993), previously defined equitable reliefas forms typically

available in equity, such as injunction, restitution, and the like. Subsequently, the Court in Great-

West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002), in a 5-4 decision,
dramatically limited the equitable relief available under section 502(a)(3). Knudson, 534 U.S. at

210-11. In Knudson, the plaintiff wanted to impose personal liability upon a beneficiary to make

restitution to the plan, arguing that the defendant was in breach ofhis contractual obligations under

the plan' s reimbursement provision. This provision required the defendant to pay the plan a certain

amount ofproceeds recovered from third parties. The Court rejected plaintiffs claim, finding that

an injunction to compel the payment ofmoney past due under a contract, or specific performance

of a past due monetary obligation, was not typically available in equity, as required by ERISA

section 502(a)(3). Id.

146. Varity Corp., 516 U.S. at 506.

147. See, e.g., Estate of Becker v. Eastman Kodak Co., 120 F.3d 5, 9-10 (2d Cir. 1997)



844 INDIANA LAW REVIEW [Vol. 38:817

highly prejudicial to the plan participant, and may also be limited to the director
disclosing such information to the plan administrator. ^"^^ For example, the DOL
urged the court to take this stance in its brief opposing the motion to dismiss of

Enron, Enron plan Committee members, Enron officers, and Enron directors.
The DOL advocated that the defendants, including director Lay,^"*^ had a duty, in
light of their knowledge, to provide accurate information regarding Enron's

financial condition to the Plan Administrators. ^^^ The DOL provided the
following facts in their motion:

57. On October 8, 2001, the Board ofDirectors was generally informed
of the existence of Watkins' memorandum and the concerns it
raised.^^^^^

58. The import of Watkins' memorandum was clear, or should have
been clear, to Lay, 01son[,] and the Board ofDirectors. Yet, instead

oftaking action to protect the Plans from the harm ofwhich Watkins
had warned. Lay and Olson^ '^^^ responded to Watkins' memorandum
by transferring Watkins to a position in Enron's Human Resources
Department and by denying her further access to Enron's financial
information.

59. Neither Enron, Lay[,] 01son[,] nor the Board of Directors informed

the rest ofthe Plans' fiduciaries ofWatkins' concerns or predictions

nor did any of these fiduciaries ensure that an independent inquiry

(holding that a summary plan description and benefits counselor's advice amounted to materially

misleading information and therefore breached fiduciary duty to provide participants with complete

and accurate information); Glaziers & Glassworkers Local 252 v. Newbridge Sec. Inc., 93 F.3d
1171, 1 180 (3d Cir. 1996) (finding that the duty to inform is "not only a negative duty not to

misinform, but also an affirmative duty to inform when the trustee knows that silence might be

harmful"); Anweiler v. Am. Elec. Power Serv. Corp., 3 F.3d 986, 991 (7th Cir. 1993) (finding an

affirmative duty to communicate facts concerning employee rights whether or not a beneficiary asks

the fiduciaries for the information). But see Bins v. Exxon Co., 220 F.3d 1042, 1045 (9th Cir.

2000) (rejecting "affirmative duty" standard with regard to representations).

148. As the directors are often the appointing body for the administrators, they would have a

duty to monitor the administrators' remedial actions after obtaining accurate information regarding

plan assets.

149. Directors Lay and Skilling had the responsibility under both the Savings Plan and ESOP

to appoint, monitor and remove the members of the Administrative Committee. For a brief

description of Savings Plan and ESOP, see supra note 78.

150. Amended Brief of the Secretary of Labor, supra note 85, at 20.

151. DOL Complaint, supra note 82, at 24. On August 14, 2001, Sharon Watkins, Vice-
President of Enron at the time, sent out a memorandum to Lay (Skilling quit Enron that day)

expressing concern about the accuracy of Enron's publicly reported financial statements. The

statement read: "I am incredibly nervous that [Enron] will implode in a wave of accounting

scandals. My [eight] years of Enron work history will be worth nothing on my resume." Id.
152. Olson was a member of the Plans' Administrative Committee. Id. at 22.



2005] EFFECTUATING RETIREMENT SECURITY 845

was undertaken on behalf of the Plans/"

Given these facts, the DOL argued that the fiduciaries not only had a duty to
disclose this information to plan fiduciaries, but additionally had a duty not to

materially mislead the plan participants by silence or inaction/ ^"^ The DOL
asserted that the fiduciaries had violated their duty of loyalty and care under

ERISA to carry out the plans for the sole benefit of the participants. The court
in Enron, agreeing with the DOL and citing to Varity Corp., held that Enron
directors may be liable for failure to disclose in special circumstances where
there is a potentially "extreme impact" on the ERISA plan as a whole and plan
participants generally could be materially and negatively affected/^^

Consequently, in such circumstances, courts might find that the directors have

an affirmative duty of disclosure/
^^

When analyzing duty not to mislead and duty to disclose cases, however, a
court must also reconcile ERISA fiduciary duties with those required by federal
security laws. Although dissemination of information could possibly come into
conflict with federal security laws, courts have found that the two laws can be

reconciled. In Enron, the court noted that securities "laws [do] not immunize

[defendants] from a claim that they failed in their conduct as ERISA fiduciaries.
To the contrary, while their Securities Act and ERISA duties may conflict in
some respects, they are congruent in others."^^^ The court acknowledged that
there were certain steps that the defendants could have taken to comply with both

their duties under ERISA and under securities laws. For example, the directors
could have disclosed the information to other shareholders and the public at

153. Mat 24-25.
154. Amended Brief of the Secretary of Labor, supra note 85, at 15,

155. In re Enron Corp. Sec, Derivative & "ERISA" Litig., 284 F. Supp. 2d 51 1, 658 (S.D.
Tex. 2003).

156. Id; ERISA § 404 (a)(1), 29 U.S.C. § 1 104 (a)(1) (2000). Nevertheless, the court in

Crowley ex rel. Corning, Inc. Investment Plan v. Corning, Inc., 234 F. Supp. 2d 222 (W.D.N.Y.

2002), interpreted directors' fiduciary responsibilities of appointment, retention, and removal of

plan fiduciaries much more narrowly than did the court in Enron. Crowley, 234 F. Supp. 2d at 230.

In Crowley, the court found that plaintiffs claim alleging defendants made material

misrepresentations and nondisclosures concerning Coming's future performance failed because the

"Board was not charged under the Plan with the duty of communicating information to the Plan

participants or beneficiaries." Id; see also In re McKesson HBOC, Inc. ERISA Litig., 29
Employee Benefits Cas. 1229, 2002 U.S. Dist. LEXIS 19473, at *52 (N.D. Cal. Sept. 30, 2002)

(holding directors not liable for failing to communicate directly with participants where the plan

documents did not place such a duty on the directors); Hull v. Policy Mgmt. Sys. Corp., No.

CIV.A.3:00-778-17, 2001 WL 1836286, at *7 (D.S.C. Feb. 9, 2001) (finding board member not
liable for breach of duty to provide information or duty not to provide false information where the

plan does not impose such duties on defendant).

157. Enron, 284 F. Supp. 2d at 566. But see Hull, 2001 WL 1836286, at *9 (stating in dicta
that the defendants did not have a duty to disclose information because to have disclosed nonpublic

information would have violated securities laws).



846 INDIANA LAW REVIEW [Vol. 38:817

large, because nothing in the securities laws prevented them from doing so or
forcing Enron to do so.^^^ The court held that the securities laws and ERISA
should be "construed to require, as they do, disclosure by Enron officials and
plan fiduciaries of Enron's concealed, material financial status to the investing

public generally, including plan participants, whether 'impractical' or not,

because continued silence and deceit would only encourage the alleged fraud and
increase the extent of injury."'^^ Otherwise, the directors could have seen to it

that the option of Enron stock be eliminated from the plan, because "securities

rules do not require an individual never to make any decision based on insider
information. To the contrary, the insider trading rules require corporate insiders
to refrain from buying (or selling) stock if they have material, nonpublic

information about the stock."^^^

Similarly, in WorldCom, the court held that Ebbers, a director and officer of

the company who had discretionary control over the administration and
management ofthe plan, would have violated his fiduciary duties under ERISA
ifthe following allegations were shown to be true: (1) he failed to disclose to the
investment fiduciary on behalf of the plan all material facts he knew or should
have known about the financial conditions ofWorldCom and (2) he disseminated
materially false data and information about WorldCom to plan participants.^^'
The court rejected the argument by Ebbers that, as an officer and director, the

duties imposed on him as an insider under the federal securities laws necessarily
conflicted with the duties imposed by ERISA. '^^ The court held, "[w]hen a
corporate insider puts on his ERISA hat, he is not assumed to have forgotten
adverse information he may have acquired while acting in his corporate
capacity."'^^ The court was clear that when an ERISA fiduciary discloses false
information, no exception exists merely because the disclosure concerns the

employer's stock. '^"^ However, the court limited its ruling, finding that the

158. Enron, 284 F. Supp. 2d at 566. The DOL in its Amicus Brieffurther noted that corporate
insiders owe a fiduciary duty to disclose material nonpublic information to the shareholders and

trading public. Amended Briefofthe Secretary ofLabor, supra note 85, at 26 (citing to In re Cady,

Roberts & Co., 40 S.E.C. 9707, S.E.C. Release No. 34-6668, 1961 WL 60638, at *3 (Nov. 8, 1961)
(incorporating the common law rule that insiders should reveal material insider information before

trading)).

159. Enron, 284 F. Supp. 2d at 565-66; cited with approval in In re Elec. Data Sys. Corp.,

ERISA Litig., 305 F. Supp. 2d 658, 673 (E.D. Tex. 2004).

160. Mat 566.
161. In re WorldCom, Inc., ERISA Litig., 263 F. Supp. 2d 745, 765-67 (S.D.N.Y. 2003).

However, note the different analysis the court gave with respect to Ebbers as opposed to the

members of the board of directors as a whole, finding that members of a corporation's board of

directors were not "ERISA fiduciaries" simply because of their control of the corporation and

alleged authority to appoint and remove plan fiduciaries. Id at 760-6 1 ; see text accompanying note

107.

162. WorldCom,263F.Supp.2dat765.

163. Id

164. Id 3.1765-67.



2005] EFFECTUATING RETIREMENT SECURITY 847

complaint did not allege that the defendants failed to disclose nonpublic material

information to plan participants, but instead, "[w]hat is required, is that any

information that is conveyed to participants be conveyed in compliance with the

standard of care that applies to ERISA fiduciaries."'^^ Furthermore, the court
noted that there may be circumstances where securities laws and ERISA are in
conflict, but not in this case.'^^

Unlike Enron and WorldCom, however, the court in In re McKesson HBOC,
did find a conflict between security laws and ERISA. '^^ The court held, "[n]ot
even a fiduciary acting in its fiduciary capacity is permitted to engage in insider

trading. Fiduciaries are not obligated to violate the securities laws in order to

satisfy their fiduciary duties."'^^ Additionally, the court found that any

alternatives which prevented violation of securities laws, such as divesting the

plan of McKesson stock, would not have avoided the loss to the plan, and,
consequently, no damages were sustained by the plaintiffs.

'^^

The law surrounding the duty to accurately inform is not at all settled
amongst the circuits. Although there is a rather clear duty not to misrepresent or

defraud employees regarding their retirement plans, there are still questions as

to when a fiduciary is acting within his fiduciary capacity and whether or not a
duty to be truthful arises only when employees ask for information or, in more
liberal interpretations, any time when silence would harm the participants.'^^ To
complicate matters even more, courts disagree as to whether or not ERISA
fiduciary duties conflict with federal securities laws and if so, how to deal with
that conflict. These are issues that were not directly dealt with in Varity Corp.

and courts have taken varying approaches as to when or if a fiduciary duty
attaches. As a result, directors need to be aware ofthe possible liability they may
face for misrepresentations and/or omissions and be prepared to adequately deal

with situations where a conflict may arise.
The nature of 401(k) plans should persuade courts that misinformation,

whether actively conveyed or through silence, significantly impacts the desired

advantages associated with such plans. Typically, 401(k) plans are established

to allow the individual employees to choose amongst several investment options

which plan is best for them. To effectuate the purpose of 401(k) plans,
employees must be provided with accurate information regarding the plan's

assets. Otherwise, when a participant is subject to improper influence by the
employer or other plan fiduciary, or if a plan fiduciary conceals material

165. Mat 767.
166. Id.

167. In re McKesson HBOC, Inc. ERISA Litig., 29 Employee Benefits Cas. 1229, 2002 U.S.
Dist. LEXIS 19473, at *20-24 (N.D. Cal. Sept. 30, 2002). But see Rankin v. Rots, 278 F. Supp.

2d 853, 874 (E.D. Mich. 2003) (agreeing with both the DOL's Brief in Enron, which the Enron

court mostly adopted, and Worldcom, but disagreeing with In re McKesson HBOC).

168. In re McKesson, 2002 U.S. Dist. LEXIS 19473, at *21.

169. Id.

170. See supra text accompanying notes 143, 147, 167; see also Schmall, supra note 28, at

901.



848 INDIANA LAW REVIEW [Vol. 38:817

nonpublic information, the participants' exercise of control is no longer
independent. ^^^ Although a participant does not have the right to obtain
investment advice from a fiduciary/ ^^ they should at least have the right to obtain
the necessary information in order to make prudent investment decisions on their
own.

Nevertheless, to prevent the demise of 401 (k) plans, directors cannot be
placed in a situation where they are forced to either disseminate nonpublic
information that is harmful to their company and which they are not required to
disclose, or face potential ERISA liability. That result may likely cause directors
to simply choose to stop offering 401(k) plans, thereby avoiding the choice

between disclosure and liability. The solution is to analyze the duty of
misrepresentation and omission under the same guise as monitoring and
overseeing responsibilities. If directors have an obligation to appropriately

monitor and oversee those they appoint as plan administrators, it only makes
sense to require the directors to disclose information which they know or
reasonably should know to plan administrators so that they can effectively carry
out their duties. Additionally, if the plan administrators do not utilize the

information effectively, the directors should have a duty to take remedial action,

which may lead to replacement ofthe plan administrator(s). Enron took this one
step further by finding that the directors may be liable for failure to disclose to
plan participants in special circumstances where there is a potentially "extreme

impact" on the ERISA plan as a whole and plan participants generally could be
materially and negatively affected. ^^^ The language in Enron, however, should
assure directors that the court will likely only find liability for nondisclosure to

plan participants in highly extreme circumstances of plan mismanagement.

Although directors cannot affirmatively mislead plan participants, only under

severe and extreme circumstances ofharm to a plan might a. director be required
to disclose nonpublic information to plan participants. ^^"^ Therefore, with the

exception ofthe above caveat, directors' duty ofmisrepresentation and omission

should be analyzed congruently as part oftheir duty to monitor and oversee plan

administrators. Ifcourts take such an approach, directors will avoid conflict with

federal securities laws, and they will be able to effectively fulfill their duties

under ERISA without being subject to overly burdensome responsibilities. The
directors will need to simply pass on the appropriate information to the plan

administrators and thereafter ensure that these administrators are effectively

using such information when managing plan assets.

171. See 29 C.F.R. § 2550.404c- 1(c)(2) (2005).

172. See id

173. In re Enron Corp. Sec, Derivative & "ERISA" Litig., 284 F. Supp. 2d 51 1, 559 (S.D.
Tex. 2003).

1 74. As noted in this section, courts have taken varying views on whether or not there is a duty

placed upon directors to disclose material information to plan participants or even to plan

administrators.



2005] EFFECTUATING RETIREMENT SECURITY 849

IV. Advice to Directors to Reduce Their Potential Liability

After analyzing the various situations in which directors have been found to

breach their fiduciary duties under ERISA, it is important to determine what
procedures directors can put into place to avoid such breaches. If directors can

put cost-effective preventative measures into place to avoid liability for plan

losses, they will not have to absorb the cost of potential litigation, and,

consequently, they will find it less burdensome and costly to offer 401(k) plans

in the fiiture. Furthermore, by implementing such measures, directors will help
avoid plan losses in the first place. The ultimate goal of ERISA—^to safeguard
retirement security—is satisfied under both rationales. The following procedures
will essentially create a favorable situation for both directors/employers and

employees.

A. Striving to Meet 404(c) Requirements

Directors should first look to ERISA to determine if they can structure their
40 1 (k) plan to meet the requirements ofERISA section 404(c). ^^^ This particular
section of ERISA shields fiduciaries from liability from plan losses if certain
conditions are met. According to the DOL in their briefagainst Enron, the "only
circumstances in which ERISA relieves the fiduciary of responsibility for a
participant-directed investment is when the plan qualifies as a 404(c) plan."'^^
Section 404(c) arises when a plan provides for individual accounts and permits
a participant to exercise control over the assets in his account, but only if a

participant exercises control over the assets in his account according to

regulations determined by the Secretary of Labor. ^^^ As a result, when the
conditions of section 404(c) are met:

(A) such participant or beneficiary shall not be deemed to be a fiduciary
by reason of such exercise, and
(B) no person who is otherwise a fiduciary shall be liable under this part
for any loss, or by reason of any breach, which results from such
participant's or beneficiary's exercise of control.

^^^

Unfortunately for directors, the Secretary of Labor has imposed rather exacting

standards so as to limit the utility of section 404(c). For this reason, in many
cases, the 401(k) plan will not meet the requirements of section 404(c) and

directors should therefore be cautious when relying on its protection. The burden
to prove that the requirements of section 404(c) are met lies with the fiduciary

175. ERISA § 404(c), 29 U.S.C. § 1 104(c) (2000).
176. Amended Brief of the Secretary of Labor, supra note 85, at 35.

177. Id.; ERISA § 404(c), 29 U.S.C. § 1 104(c).

178. ERISA § 404(c)(l)(A)-(B), 29 U.S.C. § 1 104(c)(l)(A)-(B).



850 INDIANA LAW REVIEW [Vol. 38:817

defendant. '^^ In addition, under the analysis provided by In re Unisys}^^ to
qualify for the protection afforded by 404(c), the defendant must also show that
the participant's or beneficiary's control was a cause-in-fact, as well as a
substantial contributing factor, in bringing about the loss incurred.

^^^

The regulations imposed by the Secretary ofLabor, through the DOL, focus
on the participant's ability to exercise meaningful, independent control over the
investment ofhis account. * ^^ For these regulations to be met, the participant must
have the opportunity to: "[c]hoose from a broad range ofinvestment alternatives
and diversify investments within and among investment alternatives; [g]ive
investment instruction with a frequency which is appropriate in light of the
market volatility of the investment alternatives; [and o]btain sufficient

information to make informed investment decisions."^ ^^ Although these
standards do not appear overly demanding, further specifications by the DOL
illustrate why it is often difficult for companies to comply with 404(c)
regulations.^^"*

For example, a 40 1 (k) plan must afford participants the opportunity to invest
in at least three different investment alternatives with the "core investment

alternatives" meeting specified requirements. '^^ These requirements concentrate

on diversification, risk and return characteristics, and the effect of the overall
combined investments.'^^ Essentially, these requirements "have prompted most

179. See Allison v. Bank One-Denver, 289 F.3d 1223, 1238 (10th Cir. 2002); In re Unisys

Sav. Plan Litig., 74 F.3d 420, 446 (3rd Cir. 1996); see also Rankin v. Rots, 278 F. Supp. 2d 853,

873 (E.D. Mich. 2003).

180. In re Unisys, 74 F.3d 420 (3d Cir. 1996).

181. M at 445. The case provides for a more detailed understanding of the difficulty in
meeting the section 404(c) requirements. ^

182. 29 C.F.R. § 2550.404c- 1(b) (2005).

183. Thomas R. Hoecker, ApplyingERISA 'SFiduciary Standards to 401 (K) Plans, VLR99 1

4

ALI-ABA 91, Section H-1. (2000); see Colleen E. Medill, Stock Market Volatility and 401 (K)

Plans, 34 U. MiCH. J.L. REFORM 469, 522-26 (2001) (outlining the framework of the employer's

404(c) regulations defense).

1 84. This Note is meant to provide the reader with a basic understanding of404(c) within the

context of director liability, rather than provide a comprehensive guideline illustrating how to

comply with 404(c) regulations.

1 85. Hoecker, supra note 1 83, at Section H-2.

186. Those requirements include:

• Each core investment alternative must be diversified.

• Each core investment alternative must have materially different risk or return

characteristics.

• When aggregated, the core investment alternatives must enable the participant or

beneficiary by choosing them to achieve a portfolio with aggregate risk and return

characteristics at any point within the range normally appropriate for the

participant or beneficiary.

• Each core investment alternative, when combined with investments in the other

alternatives, must tend to minimize through diversification the overall risk of the



2005] EFFECTUATING RETIREMENT SECURITY 85

1

advisors to conclude that a Participant Directed Investment Program must offer,

at a minimum, a stock fund, a bond fund and a money market (or similar)
fund."'^^ Furthermore, the "volatility rule" within the regulations requires that,

at a minimum, participants must be allowed to give instructions with respect to

their investments no less than once every three months. However, this is merely

a minimum and some investment alternatives will require more allowable
adjustments by plan participants. ^^^ The most exacting regulations, however,
come from the information requirements imposed by the DOL and "[c]omplying
with these information requirements proves to be the downfall ofmany plans."^^^
According to the regulations, a participant who exercises control over his
investments can only do so if he is able to obtain the relevant information to

make informed investment decisions. Some information must be produced upon
request while other information must be produced automatically.'^^ The
information requirements are numerous, including, but not limited to, an

explanation ofthe plan, description of investment alternatives, identification of

managers, description of fees or expenses, information surrounding the assets

within the plans, and various voting rights and restrictions. '^' Remarkably, these

participant's investments.

Id.; see 29 C.F.R. § 2550.404c- l(b)(3)(i)(B).

1 87. Hoecker, supra note 1 83, at Section H-2.

188. Id. at Section H-3; 29 C.F.R. § 2550.404c- l(b)(2)(i)(C) (2005).

1 89. Hoecker, supra note 1 83, at Section H-4.

190. See id

191. The various regulations relating to information disclosure include:

[1.] An explanation that the plan is intended to constitute an ERISA section 404(c)

plan and that plan fiduciaries may be relieved of liability for losses which are the

result ofparticipants' investment instructions.

[2.] A description of the investment alternatives available under the plan, including a
general description of the investment objectives and the risk and return

characteristics of each alternative.

[3.] Identification of any designated investment managers.

[4.] An explanation ofhow to give investment instructions, any limits or restrictions

on giving instructions and any restrictions on the exercise of voting, tender or

similar rights.

[5.] A description of any transaction fees or expenses which are charged to the
participant's account.

[6.] Immediately following an investment in an investment alternative subject to the

Securities Act of 1 933 (such as a mutual fund or other publicly traded investment),

a copy of the most recent prospectus, unless the prospectus was furnished

immediately before the participant's investment.

[7 .] Subsequent to an investment, materials provided to the plan relating to the exercise

of voting, tender or similar rights, to the extent such rights are passed through to

participants.

[8.] A description of the information available on request and the name, address and
phone number of the plan fiduciary responsible for providing that information.



852 INDIANA LAW REVIEW [Vol. 38:817

are only the more basic regulations concerning 404(c) plans. For example, when
dealing with employer securities, further distinctive requirements must be met,^^^

as is also true of various other types of plans.
^^^

Enron, which thought it had complied with section 404(c), was sadly
mistaken. According to the DOL, Enron never explained that the plan was
intended to constitute a plan described in section 404(c) and consequently did not

meet the information requirements mandating disclosure. ^^"^ Moreover, the DOL
argued that Enron did not demonstrate that it had met any of the specific
requirements relating to the investment in employer stock. ^^^ As a result, the
DOL argued that Enron retained "full fiduciary responsibility for all ofthe plan'

s

investments.
"^^^

Although difficult to establish, directors should make an effort to comply
with section 404(c) requirements so as to avoid liability for plan losses if they

can establish that they adequately fulfilled the statute' s requirements. While the

costs of complying with section 404(c) might be high and the regulations

somewhat burdensome, the overall benefit would be worthwhile if the directors
and company avoid liability for losses to plans, especially if they can make that

As noted above, certain information must be provided only on request. Information

which is required to be provided on request includes:

• A description of the annual operating expenses borne by investment
alternatives, such as investment management fees.

• Copies of any prospectuses, financial statements and reports and other

information furnished to the plan relating to an investment alternative.

• A listing of assets comprising the portfolio of an investment alternative which
holds plan assets, the value of such assets and, in the case of such assets

which are fixed rate investment contracts issued by a bank, savings and loan

association or insurance company, the name of the issuer of the contract, the

term of the contract and the rate of return on the contract.

• Information concerning the value of shares or units in investment alternatives

available to participants, as well as information concerning the past and

current investment performance of the alternative.

• Information concerning the value of shares or units in investment altemadves

held in the account of the participant.

Hoecker, supra note 183, at Section H-4; see also 29 C.F.R. § 2550.404c- l(b)(2)(i)(B)(2); Medill,

supra note 183, at 525-26 (outlining the information requirements).

192. See 29 C.F.R. § 2550.404c- l(d)(2)(ii)(E)(4).

193. See generally 29 C.F.R. § 2550.404c- 1.

194. Amended Brief of the Secretary of Labor, supra note 85, at 35-36.

195. Id. at 36.

196. M at 35-36. Although not explicitly noted by the DOL, there is a good argument that
Enron failed to meet several other requirements under section 404(c). See, e.g., Fred Reish &
Debra Davis, Reish Luftman, Reicher, & Cohen, The DOL's Enron Brief: What It Means for
401(k) Investments (Apr. 2003), at http://www.reish.com/publicafions/article_detail.cfm?

ARTICLEID=393 (discussing the other requirements under section 404(c) that Enron arguably

failed to meet).



2005] EFFECTUATING RETIREMENT SECURITY 853

claim in a summary judgment motion. In the event that the section 404(c)
requirements are not met, the directors have still placed themselves in a better

position to avoid liability than if they had not followed the regulations, since the

various regulations help ensure that the directors complied with their fiduciary

obligations. Furthermore, the regulations provided by the DOL help ensure that
plan participants will be protected and that they will receive the necessary

information to make informed investment decisions. However, given the
difficulties in establishing a section 404(c) defense, directors should not rely

solely on its protection. Accordingly, the following recommendations outlined

in this Note should be utilized by directors who also believe they qualify under
section 404(c).

B. Effectuating Various Other Procedural Safeguards

One of the most important procedures a director should follow to reduce
potential liability and to ensure the maintenance of an effective 401(k) plan is to

adequately delegate responsibilities for administration of the plan to a competent

plan committee. ^^^ The committee should be "separate, distinct and independent
from the board of directors and should not include any overlapping members."^^^

As illustrated by the various cases outlined in this Note, breaches of fiduciary
duty often arise when there is a conflict of interest, which typically occurs as a
result of overlapping roles of the directors as plan administrators or by the

directors' direct or indirect control of the administrators' decisions. The cost-
effective preventative measure of hiring an independent competent plan

committee greatly reduces the impression that they are involved in a conflict of

interest with regard to plan investments. The directors, prior to choosing any
members to serve on the committee, should fully disclose the ERISA fiduciary
duties and obligations attached to the members with regard to their position.

The committee plan should meet between two to four times per year,
depending on the size of the plan. They meet to monitor the investment options,
to discuss the "relevance of any factor in a fund that could affect its continued

suitability" and to decide the "inclusion or elimination ofthe funds from the line-

up."^^^ Additionally, the committee should also "address the administrative

functions of the plan," but separate committees may be necessary as the plan
grows.^^^ According to Trisha Brambley of Employee Benefit News, it is further
advisable that the committee be comprised of approximately four to seven senior

executives fromhuman resource, finance, and operations, again depending on the

197. See Glenn E. Kakely, Milliman USA, Employer Stock in a Plan: Is It a Mistake ?, (Dec.

17, 2002), at http://www.milliman.com/pubs/EBCaseStudyl7_Employer_Stock.PDF.

198. Id.

199. Trisha Brambley, 401(k) Oversight Committees: Foundation for Fiduciary

Responsibility, EMPLOYEEBENEFITNEWS, Oct. 2003, available arhttp://www.benefitnews.com/pjfv.

cfm?id=5140.

200. Id.



854 INDIANA LAW REVIEW [Vol. 38:817

size of the plan.^^^ Brambley also recommends that subcommittees of employees
from different divisions within the company be allowed to attend meetings
periodically to give employees a "voice regarding the plan," but should not be

given a vote, as those decisions are better left to qualified committee members.^°^

Furthermore, the directors should require that committee members implement
guidelines for monitoring the performance of the investment options and

maintain detailed records of their procedures. As part of the directors' oversight
responsibilities, it is critical that the board have access to all committee meeting

minutes and records of activity kept by the committee. The procedures followed
by the committee should further be organized into the committee's plan
investment policy—a written statement that addresses the procedures utilized by
the committee to determine plan alternatives and investments, particularly if such

investments are in company stock.^^^ Milliman USA, one of the largest
independent actuarial consulting firms in the United States, advises that a written

investment policy address eleven specified issues. After the directors have

appointed a qualified committee team to administer the 401(k) plan, they need

to review the committee's investment policy to determine whether it adequately

addresses the following eleven issues:

[1.] The plan's goals and objectives

[2.] The specific criteria for selecting investment managers, mutual
funds and other investments

[3.] Guidelines as to how funds will be monitored
[4.] Standards as to what benchmarks will be used for review of

investment performance

[5.] Minimum acceptable investment returns
[6.] A procedure to follow if a fund fails to meet investment

expectations

[7.] A policy with respect to fund manager changes
[8.] An annual investment audit procedure
[9.] Guidelines for the evaluation of plan expenses

[10.1 A policy with respect to participant education
[11.] A record retention policy to prove compliance.^^"^

In addition to the above issues, other advisors have urged that plan committees

specifically identify the types of due diligence fiduciaries should undertake in

their selection and monitoring of plan assets and in their record keeping.^^^ A
written plan investment policy that addresses all of these issues will significantly

201. Id.

202. Id.

203. Kakely, supra note 197.

204. Id.; see also Reish Luftman Reicher & Cohen, Testimony Before the ERISA Advisory
Council on Behalf of the American Society of Pension Actuaries (Sept. 19, 2002) [hereinafter

Testimony Before the ERISA Council], at http://www.reish.com/practice_areas/EmpBenefits/

testimony.cfm (listing issues that a written investment policy statement should cover).

205. See Testimony Before the ERISA Council, supra note 204.



2005] EFFECTUATING RETIREMENT SECURITY 855

reduce the risk of plan losses, thereby reducing the risk of liability to directors.

Additionally, after directors hand over responsibility of plan decisions to a

qualified plan committee, the directors are not required to reevaluate the plan

committee's decisions. Their duty is to ensure that the committee follows the

proper procedures in making those decisions, thus the importance of the written

plan investment policy.^^^

As noted in one of the eleven criteria by Milliman USA, the directors should
also require disclosure of certain information to plan participants. The DOL
issued an interpretive bulletin explaining how employers can offer investment-
related education information to participants, without the information being

considered investment advice pursuant to ERISA, after employers expressed
liability concerns associated with providing investment information.^^^ The
allowed educational information includes information regarding the plan, general

financial and investment information, asset allocation models, and interactive

investment materials.^^^ The Securities and Exchange Conunission further
advised that employers who divulge information listed within the DOL guidelines
would not be subject to registration or regulation under the Advisors Act.^^^

When plan participants are provided greater information about their plans, the
directors' oversight responsibilities are alleviated to some extent because the
employees will have a shared responsibility to effectively utilize that

information.

C. Obtaining Fiduciary Liability Insurance

Finally, after the directors have established effective procedures to ensure the

successful maintenance of a 401(k) plan, they should further protect themselves

from personal liabihty by obtaining fiduciary insurance. Fiduciary liability
insurance is intended to cover fiduciaries from claims arising out of an alleged

failure to prudently act under the dictates of ERISA.^^*' Such insurance should
provide a wide protection to the sponsor employer and its officers, directors and

206. While these are some of the more significant requirements that need to be addressed by

the directors, there are other numerous and complex issues the plan committee must work through

in establishing a high quality, well-designed 401(k) plan that complies with ERISA regulations.

Directors should encourage the conuTiittee to consult with outside professionals in creating and

maintaining a 401(k) plan that fits the particular needs of their company and its employees. For

example, as illustrated above, a company that wishes to meet 404(c) regulations will face highly

complex requirements that often can be navigated only with help from specialized advisors.

207

.

Department ofLabor Interpretative Bulletin Relating to Participant Investment Education,

29 C.F.R. § 2509.96-l(d) (2005).

208. Id.

209. Interpretive Bulletin 96-1, Participant Investment Education, Final Rule, 61 Fed. Reg.

29586 (June 11, 1996) (to be codified at 29 C.F.R. pt. 2509)

210. InsureCast, Fiduciary Liability Insurance, arhttp://www.insurecast.com/html/fiduciary

_liability_insurance.asp (last visited Apr. 19, 2005).



856 INDIANA LAW REVIEW [Vol. 38:817

employees from their liability exposures arising from ERISA.^^^ For example,
Blais Excess & Surplus Agency of Texas, Inc. ("Blais"), is one of the many
insurance companies that offers fiduciary insurance. The Blais insurance
program:

Covers past, present and future directors, officers, [and] ... the plans for

actual or alleged wrongful acts. Wrongful act includes a violation of any
responsibility, obligation or duty under ERISA .... Provides payment
of defense costs, settlements and judgments for damages for which an
insured is legally liable. Also provides coverage for administrative errors

and omissions claims. Potential claimants include plan participants, the

Department of Labor and other federal agencies.
^^^

There are two other types of coverage related to fiduciary liability
insurance.^ ^^ The employee benefit liability insurance covers mostly
administrative errors.^^'* Coverage will normally include specific errors or

omissions with respect to administration of the plan, for example, failing to

enroll an employee in the plan or providing improper advice as to benefits. The
other type of coverage is fidelity bonds. These bonds are required by law and
cover situations involving dishonest administrators or trustees who have
financially harmed an employee benefit plan. The bonds can only be used for the
benefit of the plan and the plan's beneficiaries, and is not a protection against

liability claims.
^^^

While fidelity bonds are required under ERISA, fiduciary liability and
employee benefit liability insurance are not. Nevertheless, directors should have

both types of insurance to ensure that they are adequately protected against

liability with regard to their 401(k) plan. There are numerous companies that

offer such insurance and many different policy plans for companies to choose
from. Therefore, directors should carefully review their company's insurance

coverage to determine if they feel comfortable with the protection afforded to

them, searching for better alternatives if they believe their current plan is

deficient.

However, even with insurance coverage, directors should be every bit as

cautious about violating their fiduciary duties, because directors defending

ERISA fiduciary claims typically have more at stake than their insurance covers.

211. Tennant Risk Servs. Ins. Agency LLC, Fiduciary Liability Insurance, at http://www.

tennant.com/p-fiduciary.html (last visited Apr. 19, 2005).

212. Blais Excess & Surplus Agency of Texas, Inc., Fiduciary Liability Insurance, at
http://www.blaisexcess.com/fili_tables.html (last visited Apr. 19, 2005).

213. InsureCast, supra note 210.

214. The Insure Cast Fiduciary Liability Insurance includes both fiduciary liability and

employee benefits liability insurance under one plan. This may or may not be advantageous, and

will depend on the particular situation of the insured. Id. Thus, it is important for directors to

discuss the pros and cons of combining the plans in one policy, because insurers have a tendency

to combine the insurance - which may not be the preferable option for the insured. Id.

215. Id



2005] EFFECTUATING RETIREMENT SECURITY 857

For example:

While Enron carried $85 million in fiduciary liability insurance to cover

lawsuits related to benefit plan losses and another $350 million for

directors' and officers' insurance "to protect the company and top
officials from liability if they are sued," the availability, as well as the

sufficiency, of these and other funds to pay any forthcoming judgment

is questionable.^*^

Consequently, although it is important for directors to have fiduciary liability

insurance, it is even more important that they establish proper procedures to
ensure that plan assets are prudently invested. While complying with section

404(c) regulations is one way for directors to avoid liability, the difficulty in
meeting all of the numerous and complex requirements of section 404(c) should

discourage directors from relying entirely on the safe harbor provision for

protection. Instead, in addition to striving to meet section 404(c) requirements,

directors should establish an effective system to properly oversee and review

plan investment decisions.

Conclusion

Until recently, a company's board of directors may not have paid much
attention to their company's 401 (k) asset allocation and performance. However,

corporate directors are increasingly realizing that their 401(k) plans could

become the source of significant personal liability if they do not take proper
precautions to prevent plan losses. In light of the upsurge in recent corporate

scandals involving 401(k) losses and the height of media attention focused on
such scandals, it is likely that courts will interpret ERISA fiduciary duties more
broadly, serving as a cautionary tale to directors who participate in the
management of these plans, even if their involvement is merely appointment of
plan administrators. The Enron decision and the DOL's stance in that case both
illustrate a trend toward stricter enforcement of ERISA obligations upon
corporate directors. As litigation over 401(k) plan losses increases, it is crucial
that directors understand their fiduciary obligations underERISA so that they can
initiate necessary procedures to prevent plan losses, thereby avoiding personal

liability.

The goal of ERISA is to safeguard employees' retirement funds from
corporate mismanagement. In scrutinizing directors' fiduciary obligations with

regard to plan assets broadly, the courts are effectuating this goal by forcing

216. Janice Kay Lawrence, Pension Reform in the Aftermath ofEnron: Congress ' Failure to

Deliver the Promise ofSecure Retirement to 401(K) Plan Participants, 92 Ky. L.J. 1, 32 (2003)

(quoting, in part, John Keilman, No Assurance ofEnron Insurance Payouts: Some Firms Try to

Void Policies, Cffl. Trib., Feb. 24, 2002, at 1). "[TJypically, money from both kinds of insurance

goes first for defense costs, and Enron has already asked a bankruptcy judge for permission to use

$30 million to pay the legal expenses of current and former officials." Id. at 32 n. 161 (quoting

Keilman, supra, at 1); see also Manning, supra note 20; supra notes 21-23 and accompanying text.



858 INDIANA LAW REVffiW [Vol. 38:817

directors to take measures to prevent plan losses. While this is necessary to
provide retirement security to American employees, if the courts impose overly
burdensome obligations on directors, companies may no longer offer retirement
plans because they are too costly. As a result, instead of effectuating the goals
of ERISA, the courts may actually cause a decline in retirement security. Thus,
the courts should seek a balance that provides the necessary incentives for

directors to effectively carry out their obligations as ERISA fiduciaries, while
also continuing to provide an incentive for directors to offer 401(k) plans. That

balance can be achieved by holding directors liable only for mismanagement of
plan assets for which they could have prevented through careful review of plan

investment decisions and the procedures followed in reaching those decisions.

Only if the directors are on notice of fiduciary violations, or would have been on
notice had they been attentive to the actions of the plan committee, should the

directors be found liable for plan losses. However, if there does not appear to be

any misconduct on the part of the plan committee members in reaching their
investment decisions, the directors should not be expected to do their own
evaluation or investigation into the prudence of plan investments.

Directors will be personally liable when they fail to meet their ERISA duties
of monitoring plan assets by careful review; however directors can avoid liability

by putting into place cost-effective preventative measures that ensure that proper

procedures are followed with regard to the investment ofplan assets. Therefore,

directors can avoid liability, continue to offer 401(k) plans, and effectively

monitor plans, all of which effectuate the goal of ERISA—to provide retirement
security.