Everyone following developments in the employee benefits field knows that fiduciary breach litigation has skyrocketed in recent years. Actions taken by plan fiduciaries are scrutinized by class action lawyers and there is no shortage of potential plaintiffs. Despite this scrutiny, fiduciaries continue to cling to misperceptions about their responsibilities that can hobble their efforts to protect themselves. Here are six common myths that can increase fiduciary liability exposure:
1. My recordkeeper is the plan administrator. Every year we hear about surveys indicating that significant percentages of plan sponsors don’t realize that they are plan fiduciaries. The most common reason for this misperception is that they assume that their recordkeeper is the legal plan administrator. Unless there is a specific agreement under which the recordkeeper has assumed legal responsibility for administration (called a 3(16) agreement), though, that is not the case. Standard recordkeeper agreements will disclaim fiduciary status and are drafted on the assumption that the recordkeeper employees are not exercising discretion when they follow procedures agreed to by the plan sponsor.
Every ERISA plan must have an administrator, and the default administrator is the plan sponsor unless another administrator has been appointed. The administrator will be the plan sponsor (or a committee it has appointed) in most situations, even if the individuals functioning as fiduciaries do not understand their status or the rules they are required to follow. This almost guarantees noncompliance. It also means that the plan sponsor remains legally responsible for the recordkeeper’s compliance violations and mistakes.
2. Nobody is complaining about our service providers or investments, so everything is fine. ERISA imposes an ongoing responsibility on plan fiduciaries to review the performance and fees of their service providers. This includes the investment professionals who may assist with review of other service providers. The market and fees are always changing, and the Department of Labor recommends that plan fiduciaries do requests for proposals (RFPs) every 3-5 years. Fiduciaries can also benchmark fees and send out requests for information (RFIs) to others in the service field. These activities can also help document that fiduciaries are fulfilling their legal obligation to make sure that the plan fees are reasonable in relation to the services provided.
There is no obligation to select the provider with the lowest fees, as qualify of service may also be taken into account. It also isn’t necessary to replace a provider you are happy with, but the RFP process may enable plan fiduciaries to negotiate with a current provider for lower fees or additional services.
The U.S. Supreme Court has also ruled in Hughes v. Northwestern University (595 U.S. 170 (2022)) that plan fiduciaries have an ongoing responsibility to monitor plan investments and to remove or replace underperforming investments. While not legally required, many plans have a written investment policy statement that sets out the standards for fulfilling their fiduciary responsibilities for investment selection and review. It could be a separate violation of ERISA not to follow the investment policy.
3. Our investment adviser is solely responsible for investment decisions. Under ERISA, an investment adviser is someone who makes recommendations about investments but is not empowered to make the actual investment decisions. Such an adviser is called a 3(21) fiduciary after the section of ERISA that defines investment advice. If a plan adviser makes recommendations to company fiduciaries but the company fiduciaries must make the decision whether to follow the advice, the company fiduciaries are responsible for the prudence and diversification of those investments as co-fiduciaries with the adviser. It will not be a defense to a fiduciary breach lawsuit that the company fiduciaries were merely following the recommendations of the adviser. There is another option that relieves the company fiduciaries of most of the responsibility for investment decisions, discussed below in #6.
4. We must sign or approve whatever our recordkeeper sends us. Service provider agreements are often negotiable and the larger the plan, the more likely it is to be able to negotiate changes to one-sided or burdensome provisions. These should also be sent for legal review. Provisions that often are the subject of negotiations are indemnification provisions, including caps on the service provider’s obligation to indemnify the plan, shortened contractual statutes of limitation limiting the time to file claims, extending service standards to any subcontractors hired by the recordkeeper, and mandatory arbitration provisions. Many standard contracts also lack strong provisions on cybersecurity, which has become a new focus of fiduciary attention.
Communications and Forms 5500 prepared by recordkeepers should also be carefully reviewed as there can be penalties for incomplete or late forms. Incorrect or missing answers on Form 5500 can lead to follow up from the Department of Labor or the IRS. Another risk assumed when passing on communications without review is that participants can and do sue for additional benefits when plan communications promise benefits that exceed those provided in the plan documents.
5. Our fiduciary responsibilities apply only to our 401(k) and pension plans. The people who administer welfare benefit plans-that is, plans that provide medical, drug, death and disability coverage and other types of benefits described in ERISA, including many severance pay plans-are also fiduciaries. Hiring fiduciaries are now required to get the same type of fee disclosures as they get under their 401(k) plans when they hire new providers or there are contract changes. Lawsuits against welfare plan fiduciaries are becoming more common. Pharmacy benefit manager arrangements and participant surcharges are examples of the types of claims that can be raised in litigation. Fiduciaries who aren’t paying attention to their welfare benefit plans have unrecognized litigation exposure.
6. We can do everything ourselves. ERISA applies a prudent expert standard to fiduciary behavior. This means that fiduciaries are required to consult and engage outside experts when they lack the time or the expertise to perform functions themselves. Since fiduciaries can be personally liable for losses caused by a breach of fiduciary responsibility, failure to engage professionals can be penny wise but pound foolish. Experts can be retained to assist with RFPs, investments, cybersecurity protections and plan service provider reviews.
Even more problematic for company fiduciaries with limited time or expertise can be the failure to understand that ERISA establishes ways for them to outsource their fiduciary responsibilities to other fiduciaries who have specifically agreed to assume administrative and/or investment functions. These third party fiduciaries include investment managers as defined in Section 3(38) of ERISA, who, unlike advisers, have the discretion to make day-to-day investment decisions, named fiduciaries, 3(16) plan administrators, outsourced chief investment officers (OCIOs), and pooled plan providers (PPPs). PPPs are named fiduciaries registered with the Department of Labor who are responsible for running pooled employer plans (PEPs). PEPs were created by the SECURE Act to allow unrelated employers to pool together to participate in plans run by professionals.
As helpful as outsourcing may be in limiting liability exposure, it is important for the hiring fiduciaries to understand the limitations in these service provider agreements. In particular, 3(16) agreements differ in the number of responsibilities that the outside administrator will assume. It is also important for company fiduciaries to understand that they will continue to be responsible for prudently hiring these outside fiduciaries and also for periodically reviewing their overall performance.
The Bottom Line. Fiduciaries who educate themselves about their real fiduciary liability exposure can take more proactive steps to reduce their exposure. These steps should include establishing written governance procedures allocating responsibilities and documenting their compliance procedures. Educated fiduciaries can also make sure that they have adequate fiduciary liability insurance coverage. Forewarned is forearmed.
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