What is a “Functional” Fiduciary?

ERISA’s Fiduciary Duties

Understanding the nature of an ERISA benefit-plan-fiduciary is a big deal; naming fiduciaries and identifying “fiduciary-like” decisions is an even bigger one. A recent Fourth Circuit Court of Appeals opinion reminds employers that the types of decisions made regarding benefit plans is vital in determining fiduciary status. Watch this short video to learn the 411 on what it means to be an ERISA fiduciary and continue reading below to learn more about this case.

The Story:

Ms. Rema Dawson-Murdock (“Rema”) sued her deceased husband’s (“Wayne”) employer, National Counseling Group, Inc. (“NCG”) for breach of fiduciary duties regarding administration of their group life insurance plan (“Insurance”). She sued NCG for (1) failing to inform or misinform Wayne about his continued eligibility under the Insurance; and (2) providing improper advice to a plan beneficiary. NCG argued that neither it nor the VP were “acting as a fiduciary” when managing Rema’s claim. Though the district court dismissed her claims, the appellate court agreed with Rema. Employers now have additional guidance on what it means to function as a fiduciary regarding plan decisions.

The Background:

As a full-time employee, Wayne qualified for and paid premiums for the Insurance; these payments continued when he changed to part-time status. Upon his death, Rema, as the primary beneficiary, filed a claim for benefits. The VP called Rema before she received Insurance’s response to her claim, informing her NCG would pay the claim and settle matters with the Insurance. However, three days after the VP’s call, Insurance denied her claim, citing Wayne’s change to part-time status and his failure to convert the coverage. Rema, reassured by the VP, failed to file a timely appeal with Insurance. However, shortly after the window for appeal passed, the VP informed Rema NCG would not pay her money on the claim. Rema filed suit for breach of fiduciary duties as outlined.

What happened? In a nutshell, NCG failed to perform its fiduciary duties.  Here’s what they missed: fiduciaries are not only the plan administrator or those “named” in a plan document, but may also be “any individual who ‘de facto’ performs specified discretionary” duties respecting management, assets, or administration of the plan.

The Law:

NCG was listed in the Summary Plan Description as both the plan administrator and the “named fiduciary.” The Supreme Court recognized in Mertens* that a named fiduciary is “an ERISA fiduciary” and in other cases made clear that “conveying information about plan benefits to a beneficiary to assist plan-related decision may be fiduciary activity.” Additionally, the Department of Labor states that a plan administrator, by its very nature as such, is a “functional” fiduciary.

Even though the VP of NCG was not the plan administrator or a “named fiduciary,” when he instructed Rema (i.e. provided “tailored advice”) not to appeal the Insurance claim denial, he acted in a fiduciary capacity. Conduct by an employee acting with the plan administrator’s authority is considered “discretionary activity in the administration of the plan” and is therefore a fiduciary activity under ERISA.

ERISA specifies two types of fiduciaries: “named fiduciaries” and “functional fiduciaries.” A named fiduciary is just as it sounds: named in the plan documents. A functional fiduciary is any person who:

1. exercises discretionary authority or control over management of the plan or disposition of plan assets;
2. gives investment advice for a fee; or
3. has any discretionary authority or responsibility in the administration of such plan.

Now what?!

Employers: identify “named fiduciaries” of benefit plans and identify and educate individuals who perform fiduciary-like duties (i.e., “functional” duties). The appellate court made clear that a participant or beneficiary (e.g. Wayne & Rema) does not have to allege a plan administrator or named fiduciaries also satisfy the functional fiduciary test to assert an ERISA claim. Anyone who performs functional duties may be considered a fiduciary.

Decisions considered “fiduciary” in nature:
1. verifying employee eligibility for participation in an employee benefit plan; and
2. conveying (or failing to convey) material information to a plan participant regarding retention of eligibility for a benefit plan when the plan administrator knows the participant wished to maintain participation.

Remember: A fiduciary must:
1. Act solely in the interests of the participants & their beneficiaries;
2. Prudently carry out duties;
3. Follow the terms of the plan;
4. Hold plan assets in trust or with a licensed insurance company; and
5. Pay only reasonable expenses of the plan.

*508 U.S. at 251.

Reference: https://www.ca4.uscourts.gov/opinions/181989.P.pdf