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Compliance September 15, 2023
The Fiduciary Exception to Attorney-Client Privilege
Sponsors should know when their legal communications are privileged and when they are not.
Reported by Paul Mulholland
When a plan fiduciary communicates with an attorney, those communications are not always protected by attorney-client privilege. If a fiduciary is getting advice from an attorney on a matter related to plan assets, that advice would be rendered for the benefit of the plan and could therefore be discoverable in court.
Fiduciaries are “not often” aware of this fact, says Matt Young, a partner in and ERISA attorney at Pryor Cashman LLP. If a small company sets up a 401(k), it will often hire an attorney as an adviser, but company employees may not be aware of when an attorney is representing the fiduciary and when the attorney is representing the plan, Young says.
Young explains that there are two relevant functions in which a fiduciary can act: the settlor function and the fiduciary function. An exception to attorney-client privilege applies when a fiduciary acts as a fiduciary, but not when a fiduciary acts as a settlor.
A fiduciary acts as a settlor when taking actions such as starting or terminating a plan or when modifying features, such as adding a Roth source or changing matching contribution. Settlor functions relate to plan features that participants are not legally entitled to. These discussions are privileged because the attorney is representing the company’s interest.
But when a fiduciary acts in a fiduciary capacity, once a plan is up and running, “that’s where the exception to attorney-client privilege comes up,” Young explains. Actions such as investment decisions and determining claims are for the benefit of the participants, and at those times, “the plan beneficiaries are the attorney’s clients,” technically speaking.
David Rose, a partner in Pryor Cashman LLP, explains that even though an attorney’s advice may be physically delivered to a plan fiduciary, that does not mean the advice is for them. If the communications were made when the fiduciary was acting on behalf of the plan, then the advice is for the plan. In that case, the communications can be discoverable if a plaintiff alleges a fiduciary breach.
If “advice is being rendered for the benefit of the participants,” says Rose, and a fiduciary disregards that advice, then it is important for the participants to be able to access those communications during litigation.
Young says this can create confusion, especially with smaller sponsors, because “they think the lawyer is theirs, but [the lawyer is] the plan’s.” If the “advice is provided to benefit the plan, and the plan benefits the participants,” then that plan is effectively the attorney’s client.
Despite this potential for litigation, there is little need to reduce the candor with which a fiduciary and an attorney might communicate with each other, Young says. Rather, “parties need to be cautious about what hat they are wearing and segregate their communications.”
For example, an email that contains fiduciary information, such as a participant claim, should avoid also mentioning settlor information, such as cutting matching contributions.
Young says using oral communication can be “good practical advice” if a fiduciary client “just wants to explore things,” and it “can be conducive to a frank conversation.”
Rose concurs that oral communication “can limit the amount of discoverable communication,” but it is not “foolproof,” because “you still must answer truthfully in deposition or on the stand.”
