Fiduciary Indemnification Agreement

[katieinny]

An employer is considering the implementation of a Fiduciary Indemnification Agreement for the 401(k) plan's named fiduciaries. Has anyone had any experience with these agreements, drafting one, or had to test the effectiveness of one? It sounds like a terrific thing to have, but I'd like to hear from those with real world experience. Does it mean that the company would cover the legal costs of the fiduciaries and pay any costs that might be incurred if it's determined that the fiduciary(ies) breached their his/her duty?

[QDROphile]

Although indemnification may cover litigation and defense costs, one should consider having the indemnitor cover the defense costs (subject to favorable outcome, or ?) up front, or to defend the fiduciary, because such costs may be substantial and an indemnity operates only after the fact. Indemnity is subject to public policy limits. Under ERISA, that probably means, among other things, that actions not taken in good faith or not taken in the interests of participants cannot be indemnified. The Department of Labor has a special view about indemnification of ESOP fiduciaries.

[Peter Gulia]

Although a plan cannot relieve a fiduciary from liability, ERISA section 410(a) does not preclude a person other than the plan or its trust from indemnifying a plan fiduciary, as long as that other person uses his, her, or its personal resources rather than the plan’s assets.

Before accepting an indemnity promise, a fiduciary should consider whether the provision complies with ERISA’s other fiduciary-responsibility provisions and other applicable law. Further, despite any written agreement that purports to provide more protection, a business organization (if organized under the law of a U.S. State) cannot provide indemnification unless its director, manager, member, officer, employee, or agent acted in good faith and reasonably believed that he or she acted in (or at least not opposed to) the best interests of the business organization. Recognizing the differing standards, an employer may indemnify a fiduciary for conduct that was a breach of the fiduciary’s responsibility to the retirement plan but was not a breach of the individual’s duty or obligation to his or her employer.

As QDROphile says, the fiduciary would want an indemnification promise to include not only indemnity against third persons' claims and non-liability to the employer, but also all expenses of investigation, defense, settlement, accounting, and reporting, including advances of all expenses. An indemnitee would want advances subject to an obligation to repay only upon a final court decision that the indemnitee did not reasonably believe that he or she acted in the employer's interests. An employer might prefer an obligation to repay that is triggered by an internal decision.

In negotiating and drafting indemnification agreements, I sometimes have acted for the employer, and other times for the executive. Some employers are generous without being asked; others want to set some conditions and restrictions.

[QDROphile]

When it comes to indemnifying fiduciaries, the standard is acting in the interests of the participants and beneficiaries, not in the interests of the employer. A small slip in a quickly worded message, but an important point under ERISA.

[Peter Gulia]

A Delaware general corporation may indemnify a person who serves or served, including concerning an “other enterprise”, at the request of the corporation “if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation[.]”

Del. Code Ann. title 8 § 145

http://delcode.delaware.gov/title8/c001/sc04/index.shtml

A Pennsylvania business corporation may indemnify a person who serves or served, including concerning an “other enterprise”, at the request of the corporation “if he [the indemnitee] acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation[.]”

15 Pa. Consol. Stat. § 1741

http://www.legis.state.pa.us/cfdocs/legis/LI/consCheck.cfm?txtType=HTM&ttl=15&div=0&chpt=17&sctn=41&subsctn=0

Many States similarly allow indemnification if the indemnitee’s “was at least not opposed to the best interests of the corporation[.]”

Although ERISA § 410 does not restrain indemnification provided by a person other than the plan, public policy under a State’s law or Federal common law might restrain or preclude an agreement that would set up an incentive for a fiduciary not to perform his or her responsibility. However, there is a range of conduct that, while a breach of a fiduciary’s duty to a plan, nonetheless can be indemnified by a person other than the plan.

The point of getting indemnification from one’s employer (or the business organization that asks one to serve as a plan’s fiduciary) is that such a person can indemnify its indemnitee for conduct that an employee-benefit plan cannot exonerate.

[QDROphile]

"The point of getting indemnification from one’s employer (or the business organization that asks one to serve as a plan’s fiduciary) is that such a person can indemnify its indemnitee for conduct that an employee-benefit plan cannot exonerate."

While it is true that the plan sponsor can indemnify a plan fiduciary for liabiities that the plan cannot, the point that I was trying to emphasize is that there are public policy limits on indemnification. In matters governed by ERISA, I suspect that public policy would restrict indemnification if the fiduciary were not acting in good faith or in the interests of the plan participants and beneficiaries.

I am not arguing about general limits or conditions as a matter of corporation law on the ability of corporations to indemnify. Those standards stand separately and are a separate public policy limit on indemnification. The two should not be confused.

I think the ERISA concerns are the more relevant for a question about indemnifying an ERISA fiduciary in terms of what the ERISA fiduciary can expect by way of coverage.

[katieinny]

Thank you both for your comments. Between this format and other reading, I think I have a better understanding about how this works. It seems these agreements are more common than I realized.