A PATENTED & PRIVILEGED PROCESS REVIEW
Fiduciary Audit® : A First Line of Defense for Litigation & Agency Examinations
We help our clients demonstrate robust governance practices and comprehensive operational compliance procedures through our privileged and patented “Fiduciary Audit” which provides privileged and confidential evidence of a thorough investigation and an independent validation of procedural and substantive process standards demonstrating that the fiduciaries have acted in a prudent manner.
BUILDING YOUR FIRST LINE OF DEFENSE
In this increasingly volatile litigious and regulatory environment, the risk of corporate and personal liability is very real and growing for employers, plan fiduciaries and plan trustees.
Over the last few years, there has been an increase of excessive fee litigation against employers, plan fiduciaries, and plan trustees alleging a breach of fiduciary responsibility and prohibited transactions under the Employee Retirement Income Security Act ("ERISA"). These cases typically allege failure to monitor plan fees and expenses and account for indirect revenue charged against the plan and paid to service providers. Recent cases have expanded the focus on the plan fiduciaries' lack of responsiveness in dealing with poor performing investments with much greater potential damage claims.
Litigation settlements with employers and financial institutions on excessive fees and imprudent investment cases ranged from $3.5 to $79 million from 2015 to 2023. In 2023, the DOL recovered $1.4 billion on behalf of plans and plan participants, including $444 million in voluntary settlements of disputes.
Employers are particularly vulnerable since they may not be aware of their continuing duty under ERISA to monitor investment selections and remove imprudent investment options (see U.S. Supreme Court decision in Tibble v. Edison, 135 S.Ct. 1823). Tibble also made clear that while securing independent advice from an investment consultant is "some evidence" of a thorough investigation, it is not a complete defense to a charge of imprudence and plan fiduciaries must "make certain that reliance on the expert's advice is reasonably justified.
In addition, IRS rules impose penalties against plan sponsors who fail to properly administer their retirement plans in accordance with plan documents and legal requirements even in the case of inadvertent “no harm, no foul” errors. For example, IRS has imposed sanctions for failure to ensure “informed” consent for participant distributions, obtain spousal consent, delayed enrollment of rehired employees, inadvertent failure to cover certain employees and properly apply the plan’s vesting schedule.
Fortunately, the IRS has established the Employee Plans Compliance Resolution Program (EPCRS) that allows plan sponsors to self-correct operational failures prior to an IRS audit without contacting the IRS or paying a fee. The SECURE 2.0 Act expands the ability to self-correct operational violations under EPCRS. However, both SECURE 2.0 and EPCRS require plan sponsors to be able to demonstrate that there are established practices and procedures in place that are reasonably designed to promote and facilitate overall compliance with IRS requirements for tax-qualified plans. This is a clear indication of Congressional intent to encourage self-correction and should be taken advantage of by plan sponsors.
Accordingly, employers and other plan fiduciaries should establish practices and procedures to qualify for self-correction and take proactive measures to ensure that the monitoring of plan investment options is regular, systematic and reasonable. "Best practices" include adopting a procedure and making a written record of the implementation of and the adherence to that procedure.
In addition, cybersecurity crimes have been accelerating rapidly and continue to be a challenge for employers, fiduciaries, trustees, and service providers. Also, regulatory examinations by the DOL and IRS can be overwhelming if the plan is not adequately prepared
Finally, plan sponsor employers need to ascertain the integrity and truthfulness of representations they are making in their financial statements that plans are operated in accordance with their terms and applicable law. They need to establish operational controls using best practices and procedures in order to identify and limit any potential financial and compliance risk.
MANAGING LIABILITY IN TODAY'S ENVIRONMENT
All of this liability has led to an unprecedented increase in fiduciary liability insurance costs, higher deductibles, and lower coverage limits. Insureds now need to show that they have taken steps to mitigate risk with a more robust due diligence process. The act of hiring and relying on a plan advisor does not give immunity to employers, fiduciaries, or trustees. The best lines of defense are robust governance practices and comprehensive operational compliance procedures that provide evidence of a thorough investigation and an independent validation of procedural and substantive process standards that demonstrate the fiduciaries have acted in a prudent manner.
Fiduciary Audit® accomplishes this objective with the Fiduciary Audit® Privileged Process Review which provides an independent assessment of a retirement plan's procedural and operational compliance practices. It helps protect employers, fiduciaries, and trustees from claims of imprudence on a confidential (attorney/client privilege) basis. The assessment process begins with the patented Fiduciary Audit® Investigative Questionnaire, which gathers the information needed to perform the review. The Fiduciary Audit® results in a written report that either identifies gaps in plan management and compliance or confirms prudent practices are already in place.
The following is a list of plan management practices, operations, and controls covered in the assessment:
Plan Management and Governance Structure
Investment and Administrative Committee's Governance, Management, and Documentation Practices and Procedures
Due Diligence in Appointment and Oversight of Plan Fiduciaries
Employer Controls and Compliance Procedures
Procedures to Determine Reasonableness of Plan Services, Fees, and Expenses
Documentation on Plan Compliance with DOL and IRS Requirements and Plan Provisions
Compliance with IRS Practices and Procedures Requirement to Qualify for Self-Correction
Employer's Cybersecurity and Data Management Protocols
BENEFITS OF A FIDUCIARY AUDIT®
The information gathered in the assessment process is used to make a determination whether the employer, plan fiduciaries, or plan trustees have established the requisite plan management, governance, and internal operational controls to effectively defend the plan against litigation or an investigation by the DOL or IRS.
The assessment results and determination serve as the basis of our Fiduciary Audit® Report. It is also important to note that the Fiduciary Audit® Report is provided on a privileged and confidential basis since it is legal advice by independent counsel to protect the employer, plan fiduciaries, or plan trustees in the event of litigation or a DOL/IRS examination.
For more information, please contact:
Jeffrey D. Mamorsky
Cohen & Buckmann, pc
100 Park Avenue — 16th Floor
New York, NY 10017
jeff@cohenbuckmann.com
Tel. 646.522.5612
** Fiduciary Audit® is a registered trademark licensed to Cohen & Buckmann P.C. by Fiduciary Audit Services Trust