Fiduciary liability; in the ESOP plan document, the employer is the Pl

[Guest Jim Vogl]

I am taking over a new client. In the ESOP plan document, the Employer is the Administrator but has the ability to designate someone else. The employer designated one of its employees as the "Plan Administrator". I'm trying to figure out the reason for this. Is this a good idea? Doesn't such a move expose the employee to unnecessary personal liability exposure?

[RLL]

I agree with you....it assigns to the employee, as "plan administrator" under ERISA and the IRC, responsibilities and exposure to personal liability which probably should remain with the employer.

You may want to ask why (or upon whose advice) it was done. I wonder if the employer and the employee understand the significance of this designation.

[Kirk Maldonado]

If I were that employee, I'd demand an indemnification agreement from the employer and that the employer purchase (and maintain until the statute of limitations expires) liability insurance protection for me.

[RLL]

Kirk ---

If you were that employee, I doubt that you would have accepted the appointment as plan administrator!

[Kirk Maldonado]

RLL:

You are right about that.

[Guest Jim Vogl]

Thanks to both of you for confirming my suspicions. I have another issue that maybe you can help me with. Last year I completed an ESOP transaction in which the owner of an S corporation sold his stock to the ESOP on a note. After the transaction and without discussing it with me, he gifted the note to a charity. I didn't know he was going to do this. Now he is upset because the gift triggered the recognition of gain on the note. Is there anything he can do to minimize his problem? I expect not but I thought I would try to get some opinions.

[QDROphile]

It is almost never a good idea for the employer to be the plan administrator. The employer should indemnify employees who are fiduciaries to the extent permitted by law for good faith actions. Honi soit qui mal y pense.

[RLL]

QDROphile ---

Please explain why you believe that "It is almost never a good idea for the employer to be the plan administrator."

The functions of the "plan administrator" under ERISA Section 3(16)(A) and IRC Section 414(g) seem to involve matters that are best taken care of by the employer.

Indemnification is of little value if the employer were to become bankrupt. Even when an employee is indemnified, being a defendant in litigation, or the target of an IRS audit or DOL investigation, is not fun. Why not let the employer take the responsibility and potential liability?

[Kirk Maldonado]

QDROphile:

Please translate "Honi soit qui mal y pense."

[QDROphile]

The employer should not be the plan administrator because:

1. The designation is not specific. Who is supposed to do the job? Corporations act through their boards of directors and officers. A good plaintiff's lawyer will name every director and officer as a defendant in a fiduciary action. It is better to have a specific designation of who has fiduciary responsibiity and liability. Normally, the entire board is not the appropriate collection because the board does not concern itself with plan administration, even at the supervisory level. Is the board going to review benefits claims? A person who is designated as plan administrator at least understands that he or she has a job to do.

2. It is important to recognize the distiction between employer/settlor functions and fiduciary functions, especially to have a clue about potential conflicts of interest. If the employer is the plan administrator, the distinction is hopelessly blurred. If you tell a person or a collection of persons that the person or collection is the plan administrator, it gives the appropriate sense of "otherness" that is essential to proper recognition and discharge of duties. For example, separate counsel for the employer and the plan administrator may be appropriate in certain circumstances. Pretty odd if they are one and the same. Also, the person who has authority to amend the plan (ususally the employer) should not be a fiduciary. Too much inherent conflict. And sometimes the employer needs to be able to strongarm the fiduciary. Can't twist your own arm.

There are other variations on these themes.

The motto of the Order of the Garter translates roughly to "Dishonor to him who thinks evil of it."

[Guest Jim Vogl]

Interesting discussion QDRO but I am a bit confused. If the employer designates an employee as the plan administrator to administer the plan on behalf of the employer wouldn't a smart litigator bring the officers and directors of the company into the suit anyway. The employer isn't giving up its responsibility, it is merely designating an employee to do its duty. Can't the same be said of an Administrative Committee. Under the documents in my case, there are conflicting statements. One line of discussion talks about the employee as the Plan Administrator and the other talks about the employee performing the duties of the Plan Administrator on behalf of the Employer. Are you saying that the Employer should give up all of its responsibility as the Plan Administrator?

[jeanine]

I think another question you have to ask in this situation is this: What level of employee was designated as the PA to act on behalf of the employer? The plan document says the Plan administrator is the employer. To me, this is proper, unless the plan is funded by a trust in which case it would be the trustees. And if it is proper to have the employer act as the plan administrator, it should be proper to delegate that authority to an employee to act on behalf of the employer, provided the employee has the level of authority and ability to make independent decisions. I am always a bit suspicious in cases of delegated authority,(personal experience) especially if the person to whom the authority is delegated has no clear idea of the responsibility they have assumed. They just see a few more dollars coming their way. I hope this person is a high enough level of employee that they are covered under liability insurance (E&O, and a clear statement of indemnity from the company.

[Guest Jim Vogl]

I agree with you but what level is high enough? I looked at the fiduciary liability policy of the Company and it covers any employee of the insured (which in this case is the Company). I don't believe that the employee is an officer but the person is at least a manager. I am recommending that the person be indemnified but I'm not so sure that QDROphile's opinion that by designating an employee to be the administrator on behalf of the Company eliminates the conflict or the officer/director exposure to lawsuit.

[jeanine]

I would want them to be an officer of the company if possible. This is for at least 2 reasons. First, if authority is delegated to a lesser employee, all this means to me is that the employee has the responsibility for the day to day administration of the plan. I would still argue that the employer maintained all of the ultimate obligations and responsibilities. Second, if you can't escape liability, why not have the responsibility resting with an officer who at least has the proper level of discretionary authority? I also think that the liability insurance you are looking at is not enough. We have a general liability insurance for all employees. Officers have an additional, separate liability insurance and may even carry private insurance. They also have easy access to legal counsel.

[RLL]

The Plan Administrator is the party responsible for ERISA reporting and disclosure requirements, such as preparing and filing the 5500, preparing and distributing SPDs, SMMs and SARs, etc. These are responsibilities best allocated to the employer, not the Trustee and not any employee.

[QDROphile]

In the best of all worlds, the plan document defines the plan administrator as the committee/person appointed by some executive officer, such as the CEO. There is no delegation by the employer or its board of directors, so they are insulated from a fiduciary suit -- they have no fiduciary functions. Anyone can sue anyone, so there is no guarantee against being named as a defendant, but you want to get out on a motion to dismiss or summary judgment. The appointing officer is a named fiduciary for the limited purpose of naming a fiduciary (the plan administrator). If the appointing officer makes inappropriate appointments (such as appointing someone without adequate authority, skills or knowledge)the officer has fiduciary liability, as it should be. But an outside director is not personally liable, which is as it should be. Everyone who has a specific fiduciary assignment knows what it is and must discharge it properly. Those who have no specific assignment are left out of it and should have no fiduciary liability.

Prototype plans (I know this is an ESOP column) state that the employer is the administrator, but the better ones at least allow for a specification of another or a delegation. Not the best of all possible worlds, but better than the employer as administrator.

The same concept applies for all fiduciary functions. So it goes beyond any narrow definition of functions of plan administrator.

This system does not eliminate conflicts of interest. But the structure at least makes obvious to the person with the conflict that there is an employer interest and a plan interest. When acting as the plan administrator, the person acts in the plan's interest, even if the person is also an officer of the employer. If the person is simply acting for the employer as the administrator, the lines are not so well drawn and the person will have less basis for proper action on behalf of the plan interests.

[Kirk Maldonado]

I agree with RLL and disagree with QDROphile.