Appointing a Non-Company Officer as Fiduciary
Last week we discussed some Fiduciary Best Practices to learn from Johnson v. Couturier. ERISA-Ninth Circuit Rules That ERISA Fiduciary Responsibility Can Apply To Company Decisions discusses the case in more detail, focusing on the buyout of the owner/seller/trustee's deferred compensation agreement for $34.8 million, or approximately 2/3 of the company's assets, when it was only worth between $6 million and $9 million. It recommends considering appointing someone who is not a company officer as fiduciary and using Fiduciary Liability Insurance instead of an indemnification agreement:
For many years, courts have followed the "business judgment rule", under which a company's business decision-whether to pay more salary, establish an employee benefit plan or otherwise- is not subject to ERISA. In ruling that
ERISA fiduciary responsibilities can apply to a company's business decision-even though the Court limited this ruling to situations in which an ESOP fiduciary is also a company director or officer and can directly profit from the decision-the Court has made a surprising incursion into the business judgment rule. If an employer sponsors an ESOP, or any plan which has invested in employer stock, to avoid the application of ERISA fiduciary rules to company decisions, the employer might consider appointing a fiduciary to the ESOP or plan who is not a director or officer of the company. It is not clear that, under the Court's view in this case, merely excluding the plan fiduciary, who is a director or officer, from participating in the company decision to benefit him or her will prevent the application of ERISA fiduciary rules.
Also, the case encourages employers to use liability insurance to protect plan fiduciaries, rather than an indemnification agreement under which the employer itself could be required to indemnify the fiduciary. Following the Court's reasoning, under some future circumstances, payment by the employer under an indemnification agreement could be construed by a court as depleting plan assets and thus be disallowed.