Class action attorneys have discovered employee benefit plans. Company officials, known as fiduciaries, with responsibility for a plan (including 401(k) and other retirement plans, and self-insured welfare plans) are fair game for plaintiff's lawyers. Employers and fiduciaries should take steps to minimize the risk of liability, and a good first step is a fiduciary liability review.
Federal employee benefit law (ERISA) imposes a high standard of duty and care on fiduciaries to find and fix poor administrative practices that directly or indirectly result in lost benefits, and tax laws require careful plan administration to maintain tax exempt status. Even if questionable plan practices might have been ignored without consequence in the old days of a booming economy and 30% annual returns, things have changed. Enron, WorldCom and all the other corporate scandals, along with generally negative economic news, have resulted in greater government and employee scrutiny. Employers should review how their plans are managed, and fix any problems before class action lawyers discover them. Problem areas may include:
Fees. The retirement plan vendor industry is very competitive with lots of capacity. Often, vendors offer low fees when asked. Many fiduciaries, however, are unaware of all the fees and commissions paid by the plan or its participants, or they accept higher fees than are necessary or reasonable. Fiduciaries often feel overwhelmed by the complexity of searching for a new vendor, hesitate to risk problems caused by change, and sometimes overlook the evaluation of fund management fees. Incumbent vendors cheerily take advantage of that inertia by collecting fees, often from less-than-obvious sources, that do not justify the level of service or fund performance.
Investment Performance. Many benefit plans have experienced poor investment returns in the past several years, but some have performed far worse than others. Inattentive fiduciaries with poor investment results are sitting ducks for plaintiff lawyers. These lawyers will try to build a plausible case that more and better monitoring of investments might have produced better returns. The fiduciary's defense is an adequately documented investment process that includes unbiased expert assistance, when appropriate. Anything less is an invitation to a class action lawsuit.
Company Stock. Allowing employees to invest their pension account in the employer's own stock carries additional risks for all parties. If the company fails, the employee may lose most or all retirement benefits along with a job. The finger is often pointed at plan fiduciaries who, it will be claimed, knew or should have known of the company's real predicament and should have alerted employees to sell company stock, or at least not buy any more. Responsible fiduciaries should understand their obligations to employees and how they should conduct themselves if the company's situation deteriorates.
Documents and Disclosures. All plan documents, including summary plan descriptions and investment guidelines, should be reviewed periodically to assure that they conform to changes in the law and best industry practices and that they are consistent with actual operating procedures. Documentation should be maintained to "prove" that all required notices (there are many) have been distributed in a timely manner. Failure to observe these "formalities" exposes a fiduciary to unnecessary risk and provides an easy target for a plaintiff trying to present a fiduciary as not doing its job.
Plan Administration. Plans are subject to complex tax code rules that change constantly. Mistakes occur, such as improper contributions and distributions or uncorrected discrimination test failures. The IRS has developed a flexible program for correcting mistakes without losing tax qualification, though a favorable outcome is available only if the employer finds and corrects a mistake before the IRS discovers it on audit.
Simple Steps. To minimize these problems, employers and other plan fiduciaries should:
Ensure that the plan's fiduciaries have an appropriate background for the task.
Review vendor contracts annually (we'll expand on this topic in a future report) and request proposals from outside vendors every 3 years.
Identify every revenue source from which the plan vendor is paid, and compare with proposals submitted by other possible vendors.
Conduct regular fiduciary committee meetings at which plan investments are reviewed and other plan matters are discussed. Keep accurate meeting minutes.
Analyze whether fees charged by professional managers and investment funds are justified by superior investment performance.
Avoid relying primarily on investment information from a vendor with a financial interest in the investments. Ask the vendor if it receives fees that are not disclosed to the employer.
Clearly outline responsibilities in the plan and trust documents, contracts, summary plan descriptions, board resolutions, etc.
Correct administrative errors as soon as possible after they are found, and consider carefully official guidelines published by the IRS.
Communicate clear plan claims procedures that comply with current law.
Obtain appropriate liability insurance coverage for plan fiduciaries and ensure that the plan's fidelity bond is adequate and paid up.
Develop clear fiduciary procedures and "what if" strategies to assist fiduciaries responsible for plans with employer stock.
Although it may sound like a big project, most of these tasks are simple steps that do not require enormous effort. Unfortunately, however, many fiduciaries just don't get around to doing what's necessary.