Tennessee Law Review
Just before ERISA's passage, Congress added a provision allowing a sponsoring employer to use a "named fiduciary" – usually one or more of the employer's officers – to direct the trustee. In that case, the trustee is to "be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to this Act." Such a trustee is commonly called a "directed trustee."
After ERISA became law, commentators immediately observed that section 403(a)(1) generated more questions than answers. For instance, is a directed trustee a "fiduciary" at all? Does the directed trustee have a duty to investigate the named fiduciary's direction to ascertain that it is "proper," "made in accordance with the terms of the plan," and "not contrary to" ERISA? If so, how intensive must the investigation be?
Can a named fiduciary contractually bind the trust to make an investment without the directed trustee's prior knowledge or approval? Over the past two decades, federal courts' answers to these questions have usually been dead wrong or hopelessly unclear. Congress intended generally for ERISA to strengthen the fiduciary standards of the common law of trusts. Ironically, the courts have interpreted ERISA – usually unwittingly – to weaken those standards when applied to directed trustees.
This article will argue that the directed trustee is always an ERISA fiduciary subject to the obligations – and rights – that term implies. ERISA's language, structure, expressed public policy, and legislative history, confirmed by Department of Labor ("DOL") interpretations, strongly support this result. In addition, I will argue that the directed trustee necessarily has some duty to investigate the named fiduciary's directions if the trustee is to fulfill section 403(a)(1)'s requirements and avoid co-fiduciary liability. How broad and intensive this investigation should be depends on the specific direction, its relative impact on the plan, and whether the directed trustee itself has a conflict of interest with respect to the direction.
Part II briefly suggests the empirical importance of directed trustee liability. Part III examines ERISA's trust requirement, the three ways in which the trustee can be relieved of its exclusive authority over plan assets (via an investment manager, a named fiduciary's directions, or participant control), and the consequences of each of these three means for trustee liability. Part IV analyzes ERISA's legislative history pertaining to directed trustees. Part V collects DOL pronouncements relating to directed trustees. Part VI compares ERISA's treatment of directed trustees to the view prevailing under the state common law of trusts. Part VII critiques the federal common law of directed trustees as developed in the past two decades under ERISA. Finally, Part VIII offers suggestions for improving the federal common law to better protect plan assets.
Patricia Wick Hatamyar, See No Evil - The Role of the Directed Trustee under ERISA, 64 Tenn. L. Rev. 1 (1996).