Sometimes the people involved with running qualified plans get so enmeshed in the details that they can’t see the forest for the trees. There are many steps involved in running a plan with the best service providers, good investment options and reasonable fees, all of which require active involvement of plan sponsor fiduciaries and sound oversight. However, the overriding principles are few in number. Most common mistakes I see occur when fiduciaries depart from those basic principles. Here are my top six:
· Mistake Number 1-Not Clearly Allocating Plan Responsibilities.
It’s easy for things to get lost between the cracks if there isn’t a clear understanding of who is responsible for specific matters. Many plans have committees and outside advisers but delegate many day-to-day responsibilities to employees. Many Boards want to reserve responsibility for major plan decisions such as mergers and terminations even if a committee is responsible for most plan matters.
The Fix: Committees should have charters that clearly define the responsibilities given to the committee and those retained by the plan sponsor. If a plan committee delegates responsibilities to employees such as the Head of HR the scope of the delegation should be clear.
· Mistake Number 2-Not Hiring the Right Professionals
Compliance and investment selection are increasingly complex. Few plan sponsors and fiduciaries have the expertise to run their plans alone. Yet owners of small businesses who need the help the most are often reluctant to give up control over plan decisions. Other employers are reluctant to hire outside professionals because it increases plan costs. This is a recipe for non-compliance and may make the plan a litigation target.
The Fix: Hiring professional fiduciaries after a focused search is the best way to avoid violations and mitigate litigation risk. Investment advice should come from an adviser willing to acknowledge fiduciary status in writing and to give advice tailored to the needs of the plan. Responsibility for administration can be delegated to professionals called 3(16) administrators and discretion to determine plan investments can be delegated to an investment manager described in Section 3(38) of ERISA. The manager assumes legal responsibility for day-to-day investment decisions. There are new outsourcing options such as outsourced chief investment officers (OCIOs) and pooled employer plans that are worth exploring.
· Mistake Number 3-Not Doing Regular Reviews of Services and Investments
You can never set it and forget it when running a plan. Plan fiduciaries have an ongoing responsibility to review the performance of service providers and investments and to make sure that plan fees are reasonable in relation to the services provided.
The Fix: Schedule regular reviews. Benchmark plan investments and replace underperforming providers and investments. Do periodic requests for proposals (RFPs) even if you are happy with your current provider in order to evaluate alternative fees and services available in the market. Professionals can assist on RFPs, as can your ERISA counsel. There are also services that can help fiduciaries evaluate the performance of their investment advisers or managers by comparing the performance of funds in a plan menu with other comparable funds.
· Mistake Number 4-Not following New Developments
The tax and ERISA rules frequently change as a result of statutory changes, new regulations and new case law. These changes affect how plans must be administered and the best investment funds to offer, and penalties for noncompliance can be steep. New investment funds and options are also being introduced all the time. Target date funds, individually managed accounts and alternative investment vehicles didn’t exist when ERISA was enacted. We now even have target date funds that apply a portion of a participant’s investment towards annuities or managed accounts. Fiduciaries have new responsibilities for cybersecurity of assets and data and in connection with the growing use of AI.
The Fix: Schedule regular briefings with advisers and ERISA counsel to discuss developments and their potential impact on the plan. Don’t ignore recordkeeper notices about the impact of changes in the law on administration.
· Mistake Number 5-Not Developing Written Policies and Procedures
Just knowing the specific responsibilities of plan fiduciaries is not enough. Too many fiduciaries fail to think through how these responsibilities will be fulfilled in practice, which is another recipe for non-compliance.
The Fix: Written policies and procedure provide a roadmap for how specific responsibilities will be fulfilled. Examples of these are investment policies, cybersecurity policies, and policies for finding missing participants. The Department of Labor and the IRS will ask to see policies if a plan is being audited, and evidence that written policies were followed contributes to a successful audit result. Your ERISA attorney can help you draft these policies to best protect you.
· Mistake Number 6-Not Doing Self-Audits
Too many fiduciaries rely on their recordkeeper to make sure that everything is running smoothly and assume that if they haven’t heard from their recordkeeper, everything is fine. The fact is that your recordkeeper is not legally responsible for plan mistakes. If mistakes are found prior to a government audit, correction programs provide for lower penalties. In addition, the cost of correction itself will increase the longer the mistakes remain uncorrected. For example, if participants are not auto-enrolled at the correct time, the plan sponsor will have to make up for lost contributions and missed earnings.
The Fix: Engage third parties to do periodic self-audits. The person performing the audit should not be the current recordkeeper, who may not have caught all of its own mistakes. A fiduciary audit may identify procedures that expose fiduciaries to unnecessary risk. Identified administrative errors should be timely corrected in accordance with IRS and Department of Labor corrections procedures. Fiduciary procedures that are identified as missing the mark can be improved to reduce litigation risk.
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If the procedures in the fixes are followed, the details should take care of themselves and good compliance will be the result.