Given the increasing scrutiny of retirement plan sponsors in the context of the Enron 401(k) litigation, we will continue to point out common mistakes that we see in the marketplace in the hopes that readers of this Bulletin can learn from the mistakes of others.

Over the past year we have had many discussions with Plan Sponsors which often center upon the practical side of the question: What happens if we get sued over our management of the 401(k) plan? When asked that question, one of the first things we ask in return is: What documentation do you have as to how you have conducted yourself as a fiduciary? When the issue turns to calling in ERISA legal counsel, we find much misunderstanding (and surprise) regarding the unavailability of the attorney-client privilege in ERISA fiduciary matters.

Let us state this very clearly. If you have been operating under the assumption that any communication between yourself as a fiduciary, and your ERISA counsel, is automatically subject to the protection of the attorney-client privilege, and is therefore not subject to discovery in legal proceedings against you or other fiduciaries you have likely been mistaken. Depending on the circumstances involved and the nature of the specific legal advice requested, the communications between attorney and fiduciary client are generally NOT protected by the confidentiality of attorney-client privilege. Consequently, as you make notes regarding past fiduciary conduct or uncover fiduciary issues that are of great concern to you and your internal fiduciary colleagues (e.g. prohibited transactions, misconduct or malfeasance), you must be aware that whatever information you record about such concerns will likely be discoverable by opposing counsel.

There are two different scenarios to distinguish here:

You, as a fiduciary, seek legal counsel on issues relating to your fiduciary management of the plan; and

You, as a fiduciary, seek legal counsel regarding your personal liability or fiduciary misconduct.

As a rule of thumb, your communications are not protected in circumstances that fit into the framework of scenario #1. The Federal courts long ago established that fiduciary conduct represents the plan participants (and beneficiaries), not the fiduciary him/her self. If the fiduciary is sued by the participants, or a government agency acting on behalf of the participants, the fiduciary cannot withhold or protect documents, particularly those which participants are entitled to receive in the first place. This is known as the fiduciary exception to the rules of attorney-client privilege whereby protection from legal discovery and subpoena does not apply.

In scenario #2, communications generally are protected by attorney-client privilege. In this situation, the fiduciary is representing/defending his or her interests, not the interests of the participants/beneficiaries. Because the interests of the beneficiaries are not involved, the attorney client privilege does apply.

Action Item: Prior to any discussion with ERISA counsel involving the conduct of any Plan fiduciary, inquire as to whether the conversation you are about to have, or any notes taken during that conversation are protected by attorney-client privilege.

Action Item: If you, or your fiduciary colleagues, are interested in conducting a fiduciary examination of your management practices of the retirement plan it may be prudent to have your outside counsel formally retain the services of Denali FM to conduct a Comprehensive Fiduciary Examination..

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