December 11, 2018 – For several years we’ve witnessed a growing volume of litigation related to employee benefit plans (EBP). According to the Bloomberg Bureau of National Affairs, ERISA Litigation Tracker (2018), over 100 complaints were filed for the years 2016 and 2017. These lawsuits have gained mention in the news, the web, and even television commercials with attorneys seeking retirement plan participants whom believe they’ve been “harmed”. Recently, the AICPA noted this trend in their 2018 Risk Alert for Employee Benefit Plans. They cite the subject of the lawsuits to include the following:
- Unreasonable fees charged;
- Failure to monitor fees charged to participant accounts;
- Improper investment options;
- Failure to monitor investment performance; and
- Plan oversight bodies have not operated for the exclusive benefit of the participants.
According to the Internal Revenue Service (IRS), a fiduciary is a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity. The IRS defines basic fiduciary responsibilities to include the following:
- Acting solely in the interest of the participants and their beneficiaries;
- Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
- Carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters;
- Following the plan documents; and
- Diversifying plan investments.
The responsibility to be prudent covers a wide range of functions needed to operate a plan. Since you must carry out these functions in the same manner as a prudent person, the IRS indicates it may be in your best interest to consult experts in such fields as investments and accounting. Hiring an expert can help reduce your liability but it does not completely eliminate all responsibilities and liability. The IRS provides the following list of items to consider in selecting a plan service provider:
- Information about the firm’s affiliations, financial condition, experience with 401(k) plans, and assets under their control;
- A description of how the firm will invest plan assets or how it will handle participant investment directions, and its proposed fee structure;
- Information about the identity, experience, and qualifications of the professionals who will be handling the plan’s account such as:
- Any recent litigation or enforcement action that has been taken against the firm;
- The firm’s experience or performance record;
- Whether the firm plans to work with any of its affiliates in handling the plan’s account; and
- Whether the firm has fiduciary liability insurance.
- Once hired, these are additional actions you should take when monitoring a service provider:
- Review the service provider’s performance;
- Read any reports they provide;
- Check actual fees charged;
- Ask about policies and practices (such as trading, investment turnover, and proxy voting); and
- Follow up on participant complaints.
These recent trends in litigation highlight the importance of documenting your actions of fiduciary oversight. A documented investment policy can be used as a tool to prudently monitor the investment line-up. Plan fiduciaries should also document oversight by regularly meeting to discuss relevant matters and documenting the minutes from these meetings. We recommend this documentation to include matters such as the following:
- Date, time and location of the meeting
- Identification of the people present at the meeting
- Reference to any investment reports used during the meeting
- Participation issues such as education, goals for increasing the number of participants, or deferral rates
- Plan fee matters including benchmarking for reasonableness and 408(b)(2) service provider notice compliance
- Fund performance matters including benchmarking, decisions to place a fund on a formal or informal “watch list”, and decisions to replace/add a fund to the line-up
- Consideration and approval of amendments to the plan document
- Evaluation of service providers, including a review of SOC 1 reports obtained from service providers and considerations of end-user controls
- Employee/participant complaints or concerns, if known
- Compliance with ERISA regulations
- Party-in-interest transactions and considerations
This article is an excerpt from Dopkins Employee Benefits Newsletter. To read the complete content, please click here.
About the Author
Andrew J. Reading CPA
Andy is a seasoned financial services professional with experience auditing financial systems, programs and processes for clients from a diverse range of industries. He devotes a significant portion of his career to building client relationships that are rooted in an understanding of their operations and goals through all stages of their business life cycle. As a leader of the Firm’s Risk Advisory Services Team, he oversees the design, execution, and implementation of client risk assessment and audit plans.