The Federal Common Law of Vicarious Fiduciary Liability under ERISA

Abstract

The Employee Retirement Income Security Act of 1974 ("ERISA"), the federal law that regulates employer-sponsored benefit plans, has a rich history of judiciallycreated federal common law. This Article explores the theoretical, policy, statutory, and stare decisis grounds for the development of another area offederal common law under ERISA-the incorporation of respondeat superior liability principles to impose ERISA fiduciary liability ("vicarious fiduciary liability") upon a corporation for the fiduciary activities of its employees or agents. The Article proposes that the federal courts should adopt a federal common law rule of vicarious fiduciary liability under ERISA based on the traditional scope of employment approach. Under such a rule, a corporate principal whose own internal employees or agents perform fiduciary functions during the course and within the scope of their employment or agency relationship would be strictly liable under ERISA for any breach of fiduciary duty by the employee or agent. Vicarious fiduciary liability should be limited, however, so that a nonfiduciary corporate principal would not be subject to damages claims under ERISA for the rogue fiduciary activities of its employees or agents, but would be subject to restitution as necessary to prevent unjust enrichment of the principal. A federal common law rule of vicarious fiduciary liability under ERISA is necessary for two reasons. First, a rule of vicarious fiduciary liability is essential to maintaining and enforcing ERISA's comprehensive system of fiduciary regulation. Second, vicarious fiduciary liability is needed to prevent employer overreaching under the judicially-created settlor function defense to breach of fiduciary duty claims. Absent a federal common law rule of vicarious fiduciary liability, a corporate employer in its nonfiduciary capacity as the settlor of its ERISA plan, may design the documents that govern the employer's plan as a shield against fiduciary responsibility for the actions of the employer's own internal fiduciary employees. This misuse of nonfiduciary settlor powers, which is contrary to both the letter and the spirit of ERISA, would be prevented by a federal common law rule of vicarious fiduciary liability.