Most retirement plan sponsors know that ERISA - the federal law that imposes duties (and liability for breaching those duties) on certain individuals and entities that are defined as plan fiduciaries – is the primary source of fiduciary law for plans. Governmental plans are not subject to ERISA. Therefore, we must turn to other legal sources such as state constitutional law or statutory law adopted by the state’s legislators to determine what, if any, fiduciary duties are imposed on governmental retirement plan sponsors. These laws can differ from state to state.
Most state retirement systems are created and governed by state statutes which generally incorporate some type of fiduciary guidance. The fiduciary language in these provisions is usually focused on the state retirement system only, however, not as a broader application of fiduciary law. In addition to the state retirement systems, a state may also have statutes that enable eligible governmental entities to sponsor 403(b), 401(a), and 457(b) retirement plans. These enabling statutes are less likely to have fiduciary language in them. Other sources of fiduciary law could include a state’s adoption of a version of the Uniform Trust Code, the Uniform Fiduciaries Act, and the Uniform Prudent Investor Act.
Fiduciary law may also exist as common law which is the non-statutory law that comes from the state’s judicial decisions. Common law has developed separately in each state. To attempt to capture common law, the American Law Institute developed Restatements of the law to compile and provide representative samples of common law on specific subjects. The common law of trusts (as detailed in the Restatement of Law Third, Trusts) imposes fiduciary responsibility on trusts and applies in the context of retirement plans.
The terms “fiduciary” and “trustee” are generally interchangeable, with the word “fiduciary” coming from a Latin word meaning trust. The Internal Revenue Code requires that all qualified retirement plans (including pension and 401(k) plans) and governmental 457(b) plans hold plan assets in trust. In the absence of ERISA, state trust and fiduciary law would provide guidance for governmental retirement plan assets held in trust. 403(b) plans require only a custodial account or annuity contract. The Code imposes no trust requirement on 403(b) plans. For this reason, a governmental plan sponsor may be able to argue that trust law does not apply to a non-ERISA 403(b) plan if no equivalent state law exists.
Some states may specify who is a fiduciary of its governmental plans in addition to a plan trustee, but many states may not. State statute may also provide explicit guidance on fiduciary duties in certain contexts. Many state laws mirror ERISA fiduciary laws including Ohio, which provides that the public employee retirement board shall “discharge their duties with respect to the funds solely in the interest of the participants and beneficiaries; for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the public employees retirement system; with care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.” (ORC sec. 145.11(A))
Even if it appears that no state fiduciary law directly applies to your governmental plan, other state laws may impose liability. A plan sponsor might be found liable for such legal claims as breach of contract or negligence under other areas of state law such as contract, agency, or consumer protection law.
My daughter works with okapis at our local zoo. The animal is a hodgepodge reminding me of governmental retirement plan sponsors’ fiduciary duties. So, should you equate these duties to a unicorn, ostrich, or okapi? They are not like a unicorn – rare and difficult to find, but ultimately imaginary. Nor should you treat them as an ostrich might – unpleasant information to be ignored. (Do not bury your head in the sand). Think of these duties as an okapi – seemingly unusual at first glance, but comprised of a mixture of familiar elements.
Here are some recommendations for your (okapi-like) governmental plan fiduciary best practices:
- Become familiar with state or local laws that apply to your retirement plans so you understand any duties, responsibilities, or prohibitions reflected in those laws
- Consider looking to ERISA as a best practice when dealing with retirement plan participants and assets
- Know your plan documents
- Use prudence and document decisions
- Have clear processes and procedures for plan administration
- Hire professionals, where appropriate
We understand your plan obligations can be confusing, so please reach out to any of the attorneys in our Employee Benefits group or your Bricker Graydon contact and we can assist you in putting processes in place to ensure you are meeting your duties. We also frequently give fiduciary training to retirement plan sponsors and their retirement plan committees or we can customize a training program for your specific needs.
