© Copyright 2002 Rogers Media. The following article first appeared in the April 2002 edition of BENEFITS CANADA magazine.

One of the most often cited and least understood legal terms in the pension world is 'employer fiduciary duties.' In an attempt to clarify matters, the Joint Forum of Financial Market Regulators' Proposed Regulatory Principles for Capital Accumulation Plans outlines a number of suggested fiduciary duties that plan administrators and employers will have in addition to their "general duty to act reasonably and prudently with respect to members."

Imposing fiduciary duties on employers is problematic and fails to properly recognize the dual role that employers frequently play in relation to pensions. As a sponsor, an employer is responsible for establishing, designing, amending and even winding-up the plan. As an administrator, an employer selects investment options, provides initial and continuous disclosure and ensures that decision-making tools are provided to members. This dual role is recognized in pension legislation and case law. An employer's legal responsibilities differ depending on which role it is playing.

There is ample case law supporting the stance that the employer/employee relationship is not a fiduciary one, nor does an employer have any fiduciary duties with respect to the establishment and maintenance of a defined contribution (DC) plan. On the other hand, administrators have been found to have a fiduciary relationship with members.

The rationale for the distinction between employer and administrator is clear. If an employer was found to have fiduciary duties to members it would always have to provide the maximum contribution under the plan, and could never make an adverse amendment nor terminate a plan. These restrictions run contrary to existing legislation which states that an employer can act in its own self-interest in certain circumstances.

However, the courts have acknowledged that fiduciary duties arise from the circumstances of each individual case. The Supreme Court of Canada recognizes two categories of fiduciary obligations. First, there are those that arise from relationships involving an inherent power-dependency, where it is reasonable to assume that one party has a duty to act in the best interests of the other party. Second, there are situations in which fiduciary obligations arise out of specific circumstances. In the latter instance, there must be evidence of a mutual understanding that one party has relinquished its own self-interest to act solely on behalf of the other party.

Traditionally, the employment relationship has not been recognized as a power-dependency relationship. As a result, the courts have been reluctant to impose fiduciary obligations on employers. Under the second category, though, the courts have imposed fiduciary obligations on employers. However, imposing these duties has been based on something more than merely an employment relationship.

Administrators have been thrust into the first category because pension legislation imposes an obligation to act in the best interest of plan members. But such legislation does not apply to employers, in general, or to administrators of all types of DC plans, notably registered retirement savings plans. In those cases, the question is whether there is evidence that one party had agreed to relinquish its own self-interest and act solely on behalf of the other.

A number of factors help determine whether an employer has administrator-like fiduciary duties. They include: plan design; contributions; whether participation is voluntary or mandatory; and how responsibilities are communicated. In many DC plans, the employer's role is limited to selecting a financial institution to administer the plan and remitting contributions. In this regard, financial institutions must also be factored into the fiduciary analysis.

While the need for comprehensive rules to clarify the requirements for DC plans is apparent, any new initiatives must carefully consider the law on fiduciary duties, and not simply slap the 'fiduciary' label on employers in all circumstances. BC

Paul Litner is a partner in the pension and benefits department at Osler, Hoskin & Harcourt LLP in Toronto. plitner@osler.com.

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