ERISA fiduciaries are held to the highest standards under the law and must run their plans solely in the interest of participants and beneficiaries. They must select investments using the standards of a prudent expert “familiar with such matters.”
Process Is Key. ERISA fiduciary breach litigation claiming that fiduciaries have breached their duties of prudence and loyalty has exploded and shows no signs of going away. Multimillion dollar settlements are seemingly reported every week. This litigation and government audits can challenge fiduciary decisions made for both pension and welfare plans. The standard for review looks to whether the fiduciaries followed a prudent decision-making process, and results are not reviewed with 20-20 hindsight.
It Starts with Training. Yet nobody is born knowing how to be a good fiduciary.
Fiduciary training and regular updates can fill the knowledge gap. The goal is to help fiduciaries, including employers, plan committees, trustees, investment managers and advisers, fulfill their responsibilities well with the added benefit of increasing their chances of having a fiduciary breach lawsuit dismissed at its earliest stages or of prevailing if the lawsuit isn’t dismissed.
Plan Governance Establishes the Process. Good plan governance provides a roadmap for and is the key to fulfilling ERISA fiduciary responsibilities well. This is because the governance structure sets out the various responsibilities and applicable deadlines, how those responsibilities will be fulfilled, and who is responsible for taking action. Good governance requires effective delegation, committee charters, regular oversight of plan providers and input from qualified investment and legal professionals. Following the right practices and written procedures will lead to good fiduciary decision-making. Examples of the kinds of written policies plans adopt are investment policy statements, internal controls policies, cybersecurity policies, and policies for dealing with missing participants.
Company fiduciaries are well-advised to seek assistance at all stages of the governance process, from fiduciary training and running committee meetings to drafting or reviewing documents such as Board resolutions, investment policy statements, meeting minutes and indemnification agreements. These documents are legal documents that can affect liability exposure.
Engaging and Reviewing Service Providers. Experts including attorneys can also assist with specific projects such as requests for proposals (RFPs) and outsourcing fiduciary responsibilities to third parties such as investment managers. Sample service contracts of candidates should be reviewed before and not after the final hiring decision is made. This is because nonnegotiable contracts with provisions that are too one-sided or have too many liability disclaimers should disqualify a candidate from further consideration. Working with investment partners, attorneys can also assist fiduciaries in reviewing the performance of their investment professionals, a task many plan sponsors and committees do not feel equipped to perform.
Who Is Liable for Recordkeeper Mistakes? ERISA requires every plan to have at least one Named Fiduciary. The Named Fiduciary and plan administrator is the plan sponsor unless another fiduciary has been appointed.
Plan sponsors are often surprised to learn that their recordkeeper is not a plan fiduciary. However, standard service agreements specify that the recordkeepers are not fiduciaries because they do not have the discretion that makes them fiduciaries under ERISA. Unless they have undertaken fiduciary responsibilities for administration in writing (called a 3(16) agreement), recordkeepers claim that they are just following procedures established by the plan sponsor. This means that the plan sponsor or committee it has appointed remains legally responsible for the recordkeeper’s mistakes, overall plan compliance and correcting violations such as late deposit of employee contributions. Written compliance procedures and administrative manuals can reduce the risk of plan administrative errors.
Attorneys can assist in reviewing and negotiating recordkeeper agreements to comply with ERISA’s requirements and make sure that indemnification, dispute resolution and insurance requirements in such agreements are market. These provisions should require the recordkeeper to restore losses due to the negligence or willful misconduct of its employees.
Reviewing Investments. An independent review process is also needed to evaluate plan investment alternatives on and outside the recordkeeper’s platform and to review other proposed transactions for compliance with ERISA’s prohibited transaction rules, as recordkeepers do not advise about legal issues.
Fiduciary Audits. The best way to review fiduciary compliance with current legal requirements is a formal audit by an independent third party such as your ERISA attorney or an outside consultant. The fiduciary audit is important for avoiding breaches and ERISA penalties.
These audits enable plan sponsors to find and correct violations before they are caught on audit or result in litigation and before correction costs multiply. The Department of Labor has both a voluntary fiduciary correction program and a program for late 5500 filers but you cannot use the fiduciary correction program once your plan is under audit and you cannot use the delinquent filer program if the Department of Labor has sent a written notice of failure to file Form 5500. The IRS has its own formal correction program for plan document and operational mistakes, though many errors can now be self-corrected under expanded self-correction rules enacted as part of SECURE 2.0 without making a filing with the IRS.
Hiring Outside Help. ERISA requires fiduciaries to consult professionals if they do not have the expertise required for decision-making or service provider and investment review. There are often fiduciary concerns to be addressed in matters that might appear at first glance to involve only the tax code, securities laws or other statutes of general applicability. Some examples would be transferring defined benefit plan pension risk to insurers, providing adequate cybersecurity protections for plan data and assets, and ESOP formation. Even routine participant communications can lead to ERISA litigation if they do not disclose material information or incorrectly describe plan provisions. Early coordination with outside advisers can keep fiduciaries from overlooking fiduciary issues and help them deal with the related responsibilities.
Compliance Requires a Team ERISA compliance is a team effort requiring coordination with specialists who each have their own roles. A good plan governance structure is also the roadmap for how they will work together in a coordinated manner to satisfy ERISA’s requirements