This article originally appeared in the Spring 2015 issue of Plan Consultant. To view a PDF version, please click here.
This article is the last in a three-part series summarizing the fiduciary responsibilities of those who sponsor retirement plans that are not subject to ERISA. Part 1, published in the Fall 2014 issue, looked at non-ERISA 403(b) plans established and maintained by non-profit employers. Part 2, published in the Winter 2015 issue, looked at non-ERISA church plans.
The Governmental Plan Exemption from ERISA
When ERISA was passed, the federal government declined to include governmental plans within its scope. Concerns over federalism are often raised as the primary reason. Additional reasons include these three:
[f]irst, it was generally believed that public plans were more generous than private plans with respect to their vesting provisions . second, it was believed that the ability of the governmental entities to fulfill their obligations to employees through their taxing powers was an adequate substitute for both minimum funding standards and plan termination insurance. [third] there was concern that imposition of the minimum funding and other standards would entail unacceptable cost implications to governmental entities.
Though fiduciary governance is not often raised as an issue, exempting from ERISA’s other rules included the comprehensive fiduciary rules found in sections 404 through 408.
Section 4(b)(1) of ERISA provides that Title I of ERISA does not apply to an employee benefit plan that is a “governmental plan” as defined in ERISA section 3(32). ERISA section 3(32) defines a governmental plan as:
a plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.
The Restatement also provides duties specific to investing. The General Standard of Prudent Investment (Restatement §90) incorporates some of the earlier duties such as prudence and loyalty. Additionally, Restatement §91 requires adherence to investment provisions found in the trust itself or in a statute.
Similar to the adoption by states of the UTC, the Uniform Prudent Investor Act (UPIA) has been adopted with modifications by a limited number of states. The UPIA attempts to provide a model statute for adoption that strongly correlates to the Prudent Investor Rule.
Other State Common Law or Statutes
Unlike ERISA, most state laws providing fiduciary duties do not preempt other state laws. Often other state law claims may be asserted. For example, if a plan participant files suit for benefits allegedly owed under a plan, that claim may be brought as a breach of contract claim. Depending on the state, the law governing the plan could be found in common law or the state may have adopted the Uniform Commercial Code (UCC), which may have applicability — again, depending on how the state crafted the law when it was adopted.
Alternatively, claims can be brought under an agency/principle theory if the facts support it. Claims have also been brought as tort claims for negligence.
Lastly, more and more claims are being brought under a state’s consumer protections laws. If this type of law arguably applies in your state, make sure to fully understand the types of claims and damages that can be sought, since typically these laws include provisions for punitive damages or double/triple damages if the facts support it.
Conclusion
The most important source of fiduciary duties concerning governmental plans will primarily be found in the state law enabling statute. Unlike the ERISA statute, information is often not found in the same place. Thus the governmental plan fiduciary would benefit from an exhaustive search of state statutes and regulations or a consultation with experience benefit counsel.
Dannae L. Delano, Thomas E. Clark, Jr., and Jamie N. Mahler are attorneys with the Employee Benefits and Executive Compensation team of The Lowenbaum Partnership, LLC, a labor and employment law firm based in St. Louis. They focus on comprehensive, practical and innovative employee benefits solutions for all types of employers and industry service providers, counseling clients regarding all aspects of employee benefits design, implementation, termination, and compliance for the full spectrum of benefits programs.
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