White & Case LLP - Publications - DOL Issues Guidance on Fiduciary Responsibility for the Collection of Delinquent Plan Contributions

DOL Issues Guidance on Fiduciary Responsibility for the Collection of Delinquent Plan Contributions

April 2008

Kenneth A. Raskin, Lindsey Mongeon

The U.S. Department of Labor (the "DOL") recently issued guidance in response to the prevalence of trust agreements that purport to relieve financial institutions serving as plan trustees of any responsibility to monitor and collect delinquent employer and employee contributions. In Field Assistance Bulletin ("FAB") 2008-01, issued February 1, 2008, the DOL addresses the duties of named fiduciaries and trustees with respect to the collection of delinquent employer and employee contributions to plans subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), even if such duties are not stated or clearly specified in the plan and trust documents.

According to the DOL, although employer contributions are considered delinquent when they are due under the plan but have not been timely transmitted to the plan, these contributions do not become an asset of the plan until the contribution has been made. However, if an employer fails to make such contributions, the plan has a claim against the employer for the contribution, and that claim is an asset of the plan. Under the DOL’'s plan asset regulation, employee contributions are delinquent, and considered assets of the plan, if they remain in the hands of the employer beyond the earliest date that such amounts reasonably could have been segregated from the employer's general assets, which, with respect to retirement plans, may not be later than the 15th business day of the month following the month in which such amounts were withheld or paid to the employer. Recently, the DOL has proposed an amendment to the plan asset regulation, which would provide a safe harbor contribution period of seven business days for employee contributions to plans with 100 or fewer participants.

The DOL stated that, under common law, it is a well-settled premise that trustees have a duty to enforce valid claims held by a trust. In addition, based on ERISA's statutory framework (described below), the DOL noted that authority over plan assets includes a plan’s legal claim for delinquent contributions. Such legal claim must be assigned to a discretionary trustee, a directed trustee subject to the proper direction of a named fiduciary or an investment manager.

ERISA requires fiduciaries to discharge their duties prudently and solely in the interests of participants and beneficiaries. In connection with this requirement, the DOL noted that the determination of the steps that must be taken by a fiduciary with respect to the collection of delinquent contributions depends on the facts of each case. Specifically, a fiduciary should weigh, among other factors, the value of the plan assets involved, the likelihood of a successful recovery, and the expenses expected to be incurred with respect to any collection action.

ERISA also requires that a plan be established and maintained pursuant to a written instrument, which specifies one or more named fiduciaries who jointly or severally have authority to control and manage the plan. In addition, plan assets must also be held in trust by one or more trustees who are either named in the plan or trust instrument or appointed by a named fiduciary and, except for directed trustees and investment managers, have exclusive authority and discretion to manage and control plan assets. According to the DOL, a plan trustee, therefore, will, by definition, always be a "fiduciary" under ERISA and, accordingly, is required to discharge its trustee responsibilities prudently and solely in the interest of the plan's participants and beneficiaries.

As noted above, questions have arisen as to whether, and to what extent, trust agreements and other written instruments may define or exclude the responsibilities of trustees with respect to monitoring and collecting delinquent contributions. If plan assets are held by two or more trustees, they will jointly and severally be liable for the management and control of the plan (including, presumably, management and control of collecting delinquent contributions) unless the trust document allows the trustees to agree to allocate specific responsibilities or duties among themselves. In this instance, a trustee to whom certain specific responsibilities or duties have not been allocated, will not be held liable for any loss resulting from the failure of another trustee to perform the responsibilities or duties allocated to the other trustee. In addition, where assets are held in more than one trust, a trustee is only responsible for the trust for which it is a trustee.

Thus, as explained in FAB 2008-01, if a particular trustee—including a directed trustee—is not responsible for monitoring and collecting delinquent contributions, the trustee "nonetheless would have an obligation under sections 404 and 405(a) [of ERISA] to take appropriate steps to remedy a situation where the trustee knows that no party has assumed responsibility for the collecting and monitoring of contributions and that delinquent contributions are going uncollected. Moreover, with respect to co-fiduciary liability, ERISA imposes liability on a fiduciary for another fiduciary’s breach if the fiduciary knowingly participates in the breach, enables commission of the breach, or knows of the breach and fails to take reasonable efforts under the circumstances to remedy it. Such appropriate steps to remedy the breach may include, among other things, advising the named fiduciary or the DOL of the breach, directly taking actions to enforce the contribution obligation on behalf of the plan, or seeking amendment of the relevant plan and trust documents.

In short, FAB 2008-01 makes clear that plan documents and other instruments cannot excuse financial institutions and other trustees (even directed trustees) from their long-established fiduciary duties under ERISA. As noted by the DOL, "although a fiduciary may enter into a separate agreement relieving a trustee of the duty and responsibility to collect and monitor contributions, if no trustee or investment manager is assigned this responsibility, the fiduciary with the authority to hire the trustees may be liable for plan losses due to the failure to collect contributions because the fiduciary failed to allocate this responsibility." In the DOL’s view, a named fiduciary with authority to appoint the plan’s trustees must, unless the plan provides that a trustee will be a directed trustee with respect to contributions, or the authority to collect contributions is delegated to an investment manager, ensure that the obligation to collect and monitor contributions is properly assigned to a trustee.

In situations where the trust instruments and plan documents are ambiguous as to the authority to delegate these responsibilities, the DOL observes that these instruments should be interpreted in accordance with ERISA’s requirements, instead of in a manner that would relieve the trustees and investment managers from responsibility for contributions. Similarly, where the plan and trust documents are at odds with the actions of the parties, such as where a directed trustee assumes discretionary responsibility, that trustee cannot limit its liability for exercising discretion by claiming that it is a directed trustee. A trustee cannot alter its status as a fiduciary through contractual provisions that define its trustee duties as non-fiduciary in nature.

In light of FAB 2008-01, it is unlikely that plan trustees or investment managers will agree to be assigned or allocated the responsibility of monitoring and collecting plan contributions under a trust agreement. Therefore, plan sponsors and other named fiduciaries of ERISA-covered plans should be aware that they may be held liable for plan losses arising from the failure to collect delinquent contributions.

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