This is a blog about “public” benefits issues — one that focuses heavily, but not exclusively, on California developments. If we are focusing on California’s public agency retirement and welfare plans — which are generally exempt from ERISA — why worry about ERISA litigation? We worry, or at least consider ERISA litigation, because the standards of care established for public retirement plan fiduciaries were clearly patterned after those set forth in ERISA. The ballot arguments for Proposition 21, amending the California Constitution and adopted by voters in 1984, state, among other things:
- Declares all assets of a public pension or retirement plan to be trust funds. It provides that, apart from reasonable administrative costs, the only purpose for which these trust assets can be used is the delivery of retirement benefits.
- Enacts the sole and exclusive purpose rule, which imposes on fund trustees the legal obligation to perform their duties solely in the interest of plan beneficiaries.
- Makes trustees personally liable if they invest funds without exercising, as federal law requires, the degree of care expected of a prudent person, who is knowledgeable in investment matters.
- Retains the requirement that investments be diversified so as to minimize risk. Instead of using current law’s category approach to diversification, Proposition 21 makes diversification choices subject to the prudent person/personal liability rule [emphasis added].
These four elements have proven effectiveness. They are the key parts of a federal law that safeguards the funds in more than 600,000 private pension plans [a reference to ERISA].
Although we still do not have any significant case law in California regarding the potential personal liability of public retirement board (or committee) members for breach of their fiduciary duties, the potential for such personal liability was acknowledged and discussed in a 1988 California Attorney General’s opinion.
Given all of this, here are a few “takeaways” from a recent seminar on ERISA litigation:
- There is ongoing duty to select and monitor plan investments, and check the reasonableness of fees paid from the plan. If you are not doing this on a regular basis, you could be in trouble.
- It remains critical to “document” and keep a record of your prudent process.
- You may be more exposed to criticism or litigation if you offer “proprietary” funds in your lineup.
- If your plan arrangement contemplates “revenue-sharing” to pay for recordkeeping, make sure there is a reasonable cap or limit place on it.
- You may have problems if you can offer less expensive share classes, but are not.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.