ERISA Fiduciary Duties Relating To Company Stock Options

Published July 7, 2005

With all the red flags being raised by plummeting company stock involved in retirement plan investments, it may be time to take a closer look at your company's stock. In fact, the Employee Retirement Income Security Act (ERISA) has special rules for companies that offer company stock options as a retirement plan investment.

Case in point: A group of employees sued their employer and several of its officers and directors for an alleged breach of fiduciary duties under the company's ERISA-governed retirement plan.

The employees claimed that those officers and directors, as plan administrators: 1) continued to offer company stock as an investment option even though they knew it was suffering a decline, and 2) failed to give complete and accurate information regarding that stock and the reliability of it as a retirement plan option.

The company argued that plan documents expressly prohibited the administrators' discretionary authority regarding company stock investments. But a court rejected that argument. Court: "Compliance with the terms of the plan does not, by itself, satisfy [ERISA's] imperatives."

The employees adequately claimed that there was a "precipitous" decline in company stock prices and that the officers and directors had knowledge of the company's imminent collapse. Case proceeds to trial. (In re Polaroid ERISA Litigation, S.D.NY, No. 03 Civ. 8335, 2005)

Department of Labor (DOL): If an employer decides to make employer stock an investment option under the plan, proper monitoring will include ensuring that those responsible for making investment decisions, whether an investment manager or participants themselves, have critical information about the company's financial condition so that they can make informed decisions about the stock.

You might decide to hire an individual or entity (known as a "service provider") to help with investment decisions. Knowing the difference between investment advisers and managers can limit your liability should a breach occur.

Investment manager: An individual or entity to which you can delegate investment discretion. However, a plan sponsor must have a written agreement with that investment manager and the investment manager must agree that it is a fiduciary under the plan. An agreement will absolve any other co-fiduciaries from liability in the event that the investment manager commits a breach of specific duties.

Investment adviser: There are distinctions of which you must be aware.

Fiduciary: An investment adviser who gives specific investment advice to plan participants.

Not a fiduciary: A service provider who provides general financial and investment education, interactive investment materials, and information based on asset allocation models. As long as the material is general in nature, providers of investment education are not fiduciaries.

Note: The decision to select an investment adviser or a provider offering investment education is a fiduciary action and must be carried out in the same manner as hiring any plan service provider.

As with all your duties under ERISA, as a fiduciary you must:

• act solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them;
• carry out your duties prudently;
• follow the plan documents;
• diversify plan investments; and
• pay only reasonable plan expenses.

ERISA permits employers, as plan sponsors, to hire individuals who may act as "co-fiduciaries," and take on some of the duties. But ERISA prohibits a fiduciary from using plan assets for his/her own interest or to act on both sides of a transaction involving a plan.

The DOL's Employee Benefits Security Administration offers fiduciary education for plan sponsors through its website. Surf to: http://www.dol.gov/ebsa/fiduciaryeducation.html

Related Topic(S): Benefits/Employee Retirement Income Security Act (ERISA)