Updating the Moat: Modern Risk Management Strategies for Fiduciaries
Back in the Day – the Day being as far back as the ancient Egyptian settlement of Buhen in 1860 BC – moats were excavated around castles and settlements as part of their defensive system.
In today’s terms, we would call it “risk management”. So with some editorial license, I’ll use the moat metaphor to discuss how fiduciaries can shore up their defenses and improve their governance practices. Here are a few suggestions to accomplish those objectives.
1. Appoint an individual or committee as plan administrator.
Formally designating a plan administrator is required by ERISA. Practically, it accomplishes two key things: It lays the groundwork for a clearly delineated claims procedure that might better meet the test of challenge, and it exempts the employer/plan sponsor, senior management and board of directors from being involved in any benefit disputes.
2. Carefully review the principal policy provisions of fiduciary liability insurance you have/are considering.
This includes the insuring clause, persons or organizations not insured insurance exclusions, recourse, subrogation and the deductible. Also, consider whether you are covered against ERISA civil penalties. DOL levies a 20% penalty for an amount recovered through either a court decision or settlement for breach of any fiduciary responsibility.
3. Be aware of the scope of indemnification coverage.
ERISA voids any indemnification provision that relieves a fiduciary of responsibility: A fiduciary cannot be indemnified from plan assets. DOL has interpreted that to mean that it is permissible to have an indemnification agreement between the employer and a plan fiduciary. In other words, a fiduciary can be indemnified from the assets of the employer. However, the employer's bylaws may have to be amended to provide indemnification to employees, officers or directors who are acting as fiduciaries, if permitted by state law.
4. Make sure investment responsibility has been properly delegated.
Here are a few questions to answer:
- Does the plan document expressly authorize the delegation of responsibility to an investment manager?
- Is the investment adviser a bank, registered investment adviser or an insurance company qualified under state law to manage plan assets?
- Has the named fiduciary, with respect to control or management of plan assets, appointed the investment manager?
- Most important, but often overlooked: Has the investment manager acknowledged in writing that he or she is a plan fiduciary?
If the answer to the last question is no, then you may still be responsible for the investment decisions of an otherwise qualified investment manager.
5. Understand that selection of service providers is a fiduciary decision.
Among the obvious criteria is selecting a service provider are qualifications, references and industry standing, and reasonableness of fees. Remember that there is a further fiduciary obligation to monitor your provider's performance. And, of yes, make sure that you meet the requirements of the new Department of Labor fee disclosure regulations.
6. Assume your plan will be audited.
There are two federal agencies with oversight over defined contribuion plans: the IRS oversees tax aspects of retirement plans, while DOL manages reporting, disclosure and fiduciary aspects of retirement plans.
The IRS wants to ensure that the plan actually exists; plan documents and amendments have been executed; contributions have actually been made; participation, funding, vesting and other requirements and limitations have been met; prohibited transactions have not occurred; and there are no discrepancies between the various reports filed by the employer and the plan, such as corporate tax returns, plan tax returns, W-2s and 10dstment policy statement.
Picture: Caerlaverock Castle, shown from the air, built in Scotland in approximately 1220.