Plan Sponsors. Their Owners & Management & Others Risk Personal Liability If Others Defraud Plans or Mismanage Employee Benefit Plan Responsibilities


Appropriate Prevention, Monitoring & Response Key To Risk Mitigation

Executives, board members, and other business leaders of companies providing health, 401(k) or other employee benefits under plans regulated by the Employee Retirement Income Security Act of 1974, as amended (ERISA) should heed a series of recent fiduciary liability settlement orders and lawsuits of the U.S. Department of Labor (Labor Department) as important reminders of the potential personal liability exposures executives can may face if their company’s benefit programs are not appropriately maintained and administered.

On March 29, 2011, the Labor Department sued the owner of Eyeglass Factory, Inc. (EGF), Stephen Schaffer, for breach of fiduciary duties under ERISA by failing to ensure that EGF timely forwarded health plan contributions collected from employees to pay health plan contributions to the plan and failing to ensure that he and other plan fiduciaries and service providers were bonded in accordance with ERISA’s fidelity bond requirements. The Labor Department suit charges that from July 1, 2000 to October 1, 2000, Schaffer and EGF withheld and failed to forward to the health plan contributions deducted from employee pay for health insurance coverage and contributions made to the flexible benefit plan sponsored by EGF from January 1, 2000 to December 4, 2000.  The employees’ paycheck withholdings were commingled with the company’s general assets and used for its general operating expenses. The Labor Department is asking the court to order that Schaffer and other defendants make restitution to the plan for the misapplied contributions, including lost opportunity costs, to correct prohibited transactions and to appoint an independent fiduciary to oversee the plans once Schaffer is removed as the plan fiduciary.

The Schaffer suit follows the Labor Department’s successful prosecution of a breach of fiduciary duty action against Larry Lauterback, the president and former owner of a Minnesota Cement Company, for his role in allowing his construction company to commingle with company assets and divert to company use employee health and 401(k) contributions withheld from employee’s pay.  In Solis v. Larry Lauterback, the District Court ordered Lauterback to restore $17,273.18 in unremitted employee contributions and lost opportunity costs to the company’s health and dental plan, and $747.20 in unremitted employee contributions to the company’s 401(k) plan and enjoins Lauterback from serving or acting as a fiduciary or service provider to any employee benefit plan for three years..  The order followed the entry of a consent judgment against Lauterback and the plan sponsor, Slate Cement, Inc., for failure to remit employee contributions, failure to forward employee contributions to medical and dental providers, co-mingling employee contributions of the general assets and using those assets for company operations.

The Schaffer and Lauterback actions taken in March, 2011 are only the most recent in a series of enforcement actions taken against business executives, board members, plan vendors and others for their role in committing or failing to take prudent steps to prevent or redress alleged misconduct relating to the maintenance, administration and funding of various employee benefit programs regulated by ERISA.  In recent months and years, the Labor Department has filed several lawsuits and taken other civil, criminal and administrative enforcement actions against business executives and businesses for alleged breaches of fiduciary duties arising from their failure to adequately prevent or redress actions that violate ERISA or other laws. While misuse of employee contributions by plan sponsors is a common focus of many of these actions, plan sponsors, plan service providers and members of their management with discretionary authority or responsibility over plan assets or administration or the election of those appointed to administer those responsibilities often arise out of the failure or these individuals to take prudent steps to prevent, monitor or address misconduct by other plan fiduciaries or service providers.

Plan sponsors, fiduciaries, service providers and their management should anticipate these risks will continue to rise as the Labor Department moves forward to adopt and implement revisions and enhancements to its fiduciary regulations such as those provided for in the new “Interim Final Regulation Relating to Improved Fee Disclosure for Pension Plans” scheduled to take effect in July, 2011 and the Proposed Regulation on the “Definition of the Term Fiduciary” published by the Labor Department in July and October, 2010 respectively.

Meanwhile, the Labor Department enforcement activities highlight the longstanding and ongoing policy of aggressive investigation and enforcement of alleged misconduct by companies, company officials, and service providers in connection with the maintenance, administration and funding of ERISA-regulated employee benefit plans.  Labor Department officials report that these aggressive enforcement activities during its Fiscal year 2010 resulted in monetary recoveries from 2,301investigations,  264 referrals for litigation and 128 civil lawsuits, as well as 281 criminal investigations and the indictment of 96 people.

In addition to prosecutions brought by the Labor Department, companies and individuals that exercise discretion and control of the administration or funding of employee benefit plans regulated by ERISA also may be sued personally by participants and beneficiaries for breach of fiduciary under ERISA.  A review of the Labor Department’s enforcement record and existing precedent makes clear that where the Labor Department perceives that a plan sponsor or its management fails to take appropriate steps to protect plan participants, the Labor Department will aggressively pursue enforcement regardless of the size of the plan sponsor or its plan, or the business hardships that the plan sponsor may be facing.

Companies and other individuals that in name or in function possess or exercise discretionary responsibility or authority over the maintenance, administration or funding of employee benefit plans regulated by ERISA are accountable for complying with the high standards required by ERISA for carrying out these duties.  Despite these well-document fiduciary exposures and a well-established pattern of enforcement by the Labor Department and private plaintiffs, many companies and their business leaders fail to appreciate the responsibilities and liabilities associated with the establishment and administration of employee benefit plans.  Frequently, companies sponsoring their employee benefit plans and their executives mistakenly assume that they can rely upon vendors and advisors to ensure that their programs are appropriately established the establishment and maintenance of these arrangements with limited review or oversight by the sponsoring company or its management team.  In other instances, businesses and their leaders do not realize that the functional definition that ERISA uses to determine fiduciary status means that individuals participating in discretionary decisions relating to the employee benefit plan, as well as the plan sponsor, may bear liability under many commonly occurring situations if appropriate care is not exercised to protect participants or beneficiaries in these plans. For this reason, businesses providing employee benefits to employees or dependents, as well as members of management participating in, or having responsibility to oversee or influence decisions concerning the establishment, maintenance, funding, and administration of their organization’s employee benefit programs need a clear understanding of their responsibilities with respect to such programs, the steps that they should take to demonstrate their fulfillment of these responsibilities, and their other options for preventing or mitigating their otherwise applicable fiduciary risks.  

Plan Sponsors, Fiduciaries, Service Providers & Their Boards & Management Should Manage Exposures

Given these exposures, businesses providing employee benefits to employees or dependents, as well as members of management participating in, or having responsibility to oversee or influence decisions concerning the establishment, maintenance, funding, and administration of their organization’s employee benefit programs need a clear understanding of their responsibilities with respect to such programs, the steps that they should take to demonstrate their fulfillment of these responsibilities, and their other options for preventing or mitigating their otherwise applicable fiduciary risks.  

To help guard and position themselves to defend against these and other exposures, plan sponsors, fiduciaries, service providers and others involved in the administration of health or other employee benefit plans should seek the advice of legal counsel with appropriate experience with employee benefit and other related matters to develop an understanding of ERISA and other laws and the duties and liabilities that these rules may create for their organizations and themselves personally.  For additional tips and information about managing these risks, see here.

For Help With These Or Other Risk Management Matters

If you need assistance in auditing or assessing, updating or defending your wage and hour or with other labor and employment, employee benefit, compensation or internal controls practices, please contact the author of this update, attorney Cynthia Marcotte Stamer here or at (469)767-8872.

Board Certified in Labor & Employment Law by the Texas Board of Legal Specialization, management attorney and consultant Ms. Stamer is nationally and internationally recognized for more than 23 years of work helping employers; employee benefit plans and their sponsors, administrators, fiduciaries; employee leasing, recruiting, staffing and other professional employment organizations; and others design, administer and defend innovative workforce, compensation, employee benefit  and management policies and practices. Her experience includes extensive work helping employers implement, audit, manage and defend wage and hour and other workforce and internal controls policies, procedures and actions.  The Chair of the American Bar Association (ABA) RPTE Employee Benefits & Other Compensation Committee, a Council Representative on the ABA Joint Committee on Employee Benefits, Government Affairs Committee Legislative Chair for the Dallas Human Resources Management Association, and past Chair of the ABA Health Law Section Managed Care & Insurance Interest Group, Ms. Stamer works, publishes and speaks extensively on wage and hour, worker classification and other human resources and workforce, employee benefits, compensation, internal controls and related matters.  She also is recognized for her publications, industry leadership, workshops and presentations on these and other human resources concerns and regularly speaks and conducts training on these matters. Her insights on these and other matters appear in the Bureau of National Affairs, Spencer Publications, the Wall Street Journal, the Dallas Business Journal, the Houston Business Journal, and many other national and local publications. For additional information about Ms. Stamer and her experience or to access other publications by Ms. Stamer see here or contact Ms. Stamer directly.

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Solutions Law Press™ provides business risk management, legal compliance, management effectiveness and other resources, training and education on human resources, employee benefits, data security and privacy, insurance, health care and other key compliance, risk management, internal controls and operational concerns. If you find this of interest, you also be interested reviewing some of our other Solutions Law Press resources including:

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©2011 Cynthia Marcotte Stamer.  Non-exclusive right to republish granted to Solutions Law Press.  All other rights reserved.

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About Cynthia Marcotte Stamer

Management attorney and operations consultant Cynthia Marcotte Stamer uses a client objective oriented approach to help businesses, governments, associations and their leaders manage performance, operations and risks.
This entry was posted in Bankruptcy, CEO, D&O, Director Liabiloity, Employment, Fiduciary Responsibility, Fraud, Internal Controls, Officers, Reengineering, Shareholder Liability and tagged , , , , , , . Bookmark the permalink.

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