It’s the process by which a fiduciary can accomplish this. In other words, it’s the “how” a decision gets made which is what the courts have focused on in ERISA fiduciary litigation.
I’ll leave the legal analysis of these cases to the attorneys. But as someone who works with plan sponsors in an administrative and governance capacity, let me provide 7 practical considerations for fiduciaries to shore up their defenses and improve their governance practices.
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. Prepare a Fiduciary Roster. An ERISA plan can have different types of fiduciaries who are responsible for different functions, e.g, the Plan Administrator, the Investment Fiduciary, the Trustee, the Special Trustee. It’s one of the checklist items in my recent post, In the complicated world of ERISA, a Fiduciary Checklist can help.
3. 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. The Department of Labor (“DOL”) can levy a 20% penalty for an amount recovered through either a court decision or settlement for breach of any fiduciary responsibility.
4. 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. The 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.
5. 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.
6. 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 DOL fee disclosure regulations.
7. Assume your plan will be audited.
There are two federal agencies with oversight over defined contribution plans. The IRS oversees tax aspects of retirement plans, while the DOL oversees the reporting, disclosure and fiduciary aspects of retirement plans. Both have enforcement initiatives, and doing an annual compliance review can find and fix any problems ahead of time.
This discussion is for information purposes only and is not intended as legal or tax advice. Plan Sponsors and other fiduciaries should always discuss the application of ERISA to their specific situations with experienced advisors.