Risk Mitigation Starts with Retaining Demonstrated Experts

It is widely understood that a plan sponsor that lacks expertise is obligated to seek the advice of qualified experts to assist them in their fiduciary duties. But to what extent can a plan sponsor rely on their expert’s advice? According to Clark v. Feder Semo and Bard, P.C., No. 12-7092 (D.C. Cir. Jan. 7, 2014), reliance on an expert is consistent with a fiduciary’s obligation to act with loyalty and prudence.

The Court’s Ruling

The D.C. Circuit ruled in favor of the plan sponsor. According to the court, the plan sponsor:

1. “Properly” relied on the advice of outside counsel
2. Was “reasonably justified under the circumstances” to rely on counsel’s advice
3. Made a reasonable decision that any prudent trustee would have made under similar circumstances
4. Made a prudent decision “based on the circumstances at the time of the challenged decision”

Key Factors for Covered Service Providers

Important to all covered service providers (CSP) is the court’s conclusions that reliance on counsel’s recommendation was “reasonable” because counsel:

1. Had expertise in ERISA, making the CSP “qualified”
2. Had been advising the plan since the 1990s, making the CSP “familiar” with the plan
3. Had conducted a thorough review of the relevant documents, making the CSP “deliberate”
4. Made recommendations based on a reasonable investigation, showing the CSP adopted “procedural prudence”
5. Documented their recommendations, showing the CSP adopted “substantive prudence”
6. Made recommendations consistent with the plan sponsor’s understanding, making the CSP “collaborative”

Conclusion

The moral of this case: there is value in retaining qualified expert CSPs. A plan sponsor should trust but verify and a CSP must not misrepresent their expertise.