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Ten Liability Traps Plan Fiduciaries Should Know About

Retirement plan fiduciaries are subject to standards governing their conduct in exercising their responsibilities acting on behalf of retirement plan participants.  While many understand they must act solely in the best interest of plan participants with the exclusive purpose of providing retirement plan benefits – and that they must do so in a prudent manner following plan documents, diversifying plan investments and paying only reasonable plan expenses – they may also be unaware that their action or inaction can still put them at risk to liability from either plan participants, governmental agencies, such as the Department of Labor (DOL) and the Internal Revenue Service (IRS).  And, for plan trustees, that liability may be personal!

I am not an attorney – I once thought that the doctrine of constructive knowledge had something to do with passing a contractor’s exam – but, I do listen to those that specialize in ERISA law, and they are remarkably consistent.

One such expert in this area is Ary Rosenbaum, a  Garden City, NY-based ERISA attorney that recently outlined his ‘top ten’ hidden liability traps all plan sponsors should know about.  Here’s his Top Ten with some additional comments:

1.       Just because a plan is participant-directed, plan sponsors can still be ‘on the hook’.   Sure, you made a 404(c) election and participants make their own decisions.  Are you clear?  Maybe not!   Plans that don’t have an Investment Policy Statement (IPS), consistently monitor plan investments, or provide investment education on a regular schedule have often found themselves defending participant law suits for fiduciary breaches.  So, yes, you can lose your 404(c) protection.

2.       Plan fiduciaries are responsible for the errors and malfeasance of their retirement plan providers.   The ones who make decisions regarding the plan are responsible for the decisions they make – and that includes the decision to hire a provider.  If you hire a crook, you’re not off the hook (I had to do that).  If your TPA doesn’t make required filings, you’re responsible.  Hiring a provider is a fiduciary function.  Hiring a bad one is a breach.

3.       Plan fiduciaries need to annually review the costs and services of their plan providers, as well as their plan.   Annual `benchmarking’ is a must, and your process should be benchmarking three things (here at IFG, we call it the B3 process, benchmarking investments, fees and expenses, and services).  And, there’s only one way to do it:  By reviewing what competing service providers are offering, doing, and charging.   If you have a sales rep doing that for you, you may have a fox watching the hen house if there’s an incentive to choose providers, etc., that pay the most in hidden revenue sharing.  Your best bet:  An independent plan advisor with a non-conflicted process or an ERISA attorney.

4.       Fiduciaries need to know the true cost of their plan’s administration.  This isn’t easy to do when some of the fees are hidden.  While new disclosure rules kick-in in 2012, the truth is you need to know now – right now – because excessive fee lawsuits don’t deal with future charges; they deal with what’s happened in the past, and current rules do not provide fiduciaries with any ‘get out of jail free’ card simply because the new rules take effect next year.

5.       Avoid the one-stop shop; you should have at least one provider who is independent.  Too often, plan fiduciaries select a provider that provides all the services under one umbrella.  The provider is the TPA, financial advisor, and provides all the legal documents.   Ary calls this a `terrible idea’ because there is no checks and balances.  When one provider is wearing all the hats, there’s no one to tell you if/when someone isn’t doing their job.

6.       Plan fiduciaries need to keep good records.   This includes documenting all decisions, whether made on your own or with the plan provider.   Retirement plans are legal entities, so fiduciaries must have copies of all plan documents, including amendments, filings, statements, trustee meeting minutes, and investment decisions.  TPAs, advisors, and ERISA attorneys may have some plan records, but a fiduciary is required to have all the plan records because it’s their responsibility.

7.       The hiring of plan fiduciaries must be through a process.   When hiring an advisor or a TPA, fiduciaries need to have a process, documenting how and why they selected a plan provider because that is a fiduciary function.  Picking an advisor because he’s a relative or picking a provider because of another business relationship isn’t enough – and could likely be seen as a breach of fiduciary duty to plan participants. 

8.       If plan fiduciaries are not retirement plan experts, they should hire some.  Plan fiduciaries are required to act as would a prudent expert, which includes expertise in areas such as investments.  It’s a standard much higher than reading financial magazines and watching Kramer.  Lacking that expertise, plan fiduciaries should hire professionals to carry out investment and record keeping functions.  Failing to hire an expert for plan investments and participant education could easily be regarded as a fiduciary breach.

9.       The use of a corporate trustee does not protect the plan sponsor from liability.  Many owners of plan sponsors elect to use corporate trustees because they don’t want the liability or because they can elect a ‘limited scope’ audit of their 5500 filing.  But, it’s worth knowing the corporate trustee does not assume the plan sponsor’s liability.  Trustees do not hire providers, review plan documents, monitor investments, services, or costs or ensure proper administration.  They simply pay-out to participants and file tax withholding forms; these are not fiduciary functions.

10.   The ERISA bond does not protect plan fiduciaries from liability.  The bond specifically insures the plan against losses due to fraud or dishonesty on the part of persons who handle plan funds.  It does not protect against fiduciary breaches.  Fiduciary insurance can and should be purchased.  Virtually every ERISA attorney can tell you `war stories’ about how having this insurance saved plan sponsors a lot of money, even on the cases they won!

This is a brief glimpse, to be sure; and plan fiduciaries should discuss these with an ERISA attorney and an independent plan consultant.  The days of easy and convenient answers may be coming to an end.


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Comment   |  7 years, 10 months ago from Moorpark, CA