WHAT YOUR PROTOTYPE PLAN PROVIDER DOESN'T TELL YOU
carol@cohenbuckmann.com
One-stop shopping sounds attractive. Many employers, not necessarily just the smaller ones, want help managing their qualified plans. They are busy running their businesses, and the idea of adopting a plan that has been pre-approved by the IRS and is maintained by a professional third party is very appealing. The number of employers adopting pre-approved plans will surely increase now that the IRS has announced sharp cutbacks in the ability of employers to get approval letters for individually-designed plans. But what do you need to know when you make that decision?
The business model of these providers is that they are not fiduciaries to their plans, and so far, the courts have upheld them. The Department of Labor has issued new fiduciary regulations that also allow providers to continue in business as non-fiduciaries. There is nothing wrong with that, but most employers who adopt pre-approved plans remain unaware that the provider has not assumed a fiduciary role and that they-not the provider-are responsible for compliance and plan errors.
Unless they have hired an investment fiduciary, these employers also remain solely responsible for plan investments, including making sure that the menu of investments made available to participants is prudent and diversified and has reasonable fees. And unless they have the provider’s documents reviewed by an attorney with expertise in this area, they may be needlessly exposing themselves to liability. That also is not well understood, even though the documents almost always have a vague warning on the first page that they should be reviewed by an attorney. That may seem like an unnecessary cost; it isn’t.
Here are a few of the areas where employers would be well-advised to get independent assistance:
That service agreement that is sent to you with an arrow indicating where to sign is really negotiable, and you will want an attorney to review carefully its provisions on indemnification and responsibilities, and also where suit may be brought if you have a contract dispute. Do you really want to have to sue the provider in Idaho?
Plans need ERISA bonds and it is highly recommended that the actual fiduciaries protect themselves with fiduciary liability insurance. A qualified attorney can help get the right coverage.
More and more lawsuits seem to be based on plan communications. That seemingly innocuous plan booklet called the SPD can be a lawsuit waiting to happen if it isn’t well-drafted. Yet many providers produce “cookie cutter” SPDs that omit important details or aren’t drafted to take advantage of the protections available to plan fiduciaries. For example, courts have held that plans may provide their own reasonable time limits on when suit may be brought after benefit claims are denied, but ONLY if the plan communications alert participants about those limits.
The people helping to set up these plans are not attorneys, and they may miss legal issues. For example, qualified plans must have a U.S. domestic trust, but we sometimes see plans set up by providers that have only executives located outside the U.S. as trustees because the set up team is not aware of this rule. Sometimes they don’t realize there are related employers that affect required plan testing, which can be a very big deal and can involve costly corrections.
The bottom line is that it is less expensive in the long run to get qualified outside advice than to deal after the fact with problems that could have been avoided.