Reducing Personal Risk for ERISA CIOs

When we make the rounds in the CIO community, we find that CIOs know that investing plan assets means acting as an ERISA fiduciary and having a duty to act prudently and in the best interests of participants.

What many CIOs may not know, or perhaps would prefer not to think too much about, is that they are personally liable for breaches. Given the stakes, there are actionable steps CIOs should take today to reduce their legal risk.

1. Stay Current with Your Peers

ERISA may be over 40 years old, but the law is constantly adapting to a changing system and changing best practices in the fiduciary expert community. For example, as defined contribution line-ups evolve and baby boomers face complex draw-down decisions, CIOs are shouldering important decision-making roles. Developments and actions taken by similarly situated peer experts will form the basis for what is prudent and appropriate under ERISA.

An effective way to stay current is by participating in peer-to-peer webinars and conferences highlighting legal and investment developments, like those offered by CIEBA and other groups. It’s also wise to memorialize attendance at these events to create a record that the CIO is, in fact, staying current on what their fellow experts are doing.

Also, CIOs should consider periodic fiduciary training for their staff. Regular trainings create both a record of diligence and a culture that encourages staff to go back to their desks and review what they do every day. 

2. Know Your Insurance and Indemnification

CIOs need to ensure that they are personally protected from liability claims and the cost to defend such claims. Most CIOs are covered by insurance policies and employer indemnifications, but the coverages can vary. Be sure you understand what is covered and how to use insurance policies. At the very least, know where to find your policy and what circumstances warrant a closer look. 

Similarly, CIOs need to understand whether their employer is providing an indemnity and what that indemnity covers. It is important to confirm that the company agrees to provide independent legal counsel in the event CIOs are personally named in a lawsuit or investigation.  Nine times out of 10, a CIO’s interests are in-line with the employer’s, but in the event they are not, CIOs need protection. 

3. Document, Document, Document!

CIOs are not required to guarantee successful results, but they must employ a “prudent expert” process (not just a “prudent layman” process). The foundation of a prudent process is an effective governance structure.  CIOs should:

• Periodically review governing documents (e.g., committee charters and guidelines) to make sure they are consistent and current;
• Ensure investment committees meet regularly and that members are attending, even via conference call (just ask Enron’s lawyers how stellar member attendance records were when it came time to defend); and
• Maintain committee decisions by preparing minutes that include rationales, options considered, and relevant expert materials.

4. Don’t Ignore Warning Signs

The most direct risk for CIOs is the plaintiffs’ bar. Over the past decade, class-action litigation has increased dramatically. For example, there have been at least 80 lawsuits challenging plan fees and settlements ranging to upwards of $62 million.

There are typically warning signs months in advance and staying attentive can give lawyers a leg up when it comes to vigorously defending. Pay attention to announcements in newspapers or company bulletin boards and watch for unusual or overly broad document requests from participants. 

Consider immediately alerting relevant parties (e.g., insurer, corporate counsel) and conducting a review of the plan to proactively identify issues and allow a more effective response. It is also often worth beginning the process of retaining an attorney and consulting with the plan sponsor’s insurer as early as possible.

Dennis Simmons is the Executive Director of the Committee on Investment of Employee Benefit Assets (CIEBA), a trade group comprised of more than 100 of the country’s most experienced ERISA CIOs and fiduciaries.  Michael Kreps is a Principal at the Groom Law Group where he advises retirement plan fiduciaries and service providers.