The responsibilities facing employers who sponsor qualified employee benefit plans, including 401(k) plans, defined benefit plans, employee stock ownership plans and 403(b) plans, are many and not to be taken lightly. The United States Department of Labor (“DOL”) has increased enforcement efforts, the number of lawsuits against plan sponsors is increasing, and participants have heightened awareness of the importance of their retirement needs. This highlights the fact that plan sponsors should ensure that they have taken appropriate steps to reduce the risks associated with offering a qualified benefit plan to employees. During 2012, the DOL increased its enforcement personnel from 913 to 1,003. According to an Employee Benefits Security Administration ("EBSA") Fact Sheet, in 2012, the DOL closed 3,566 civil cases against plan sponsors, which accounted for $1.27 billion in penalties and fines. The Fact Sheet also reported that the DOL closed 318 criminal cases – in which 117 individuals, including plan officials, corporate officers and service providers, were indicted – and 78 of those criminal cases were closed with guilty pleas or convictions.
To reduce their risk, plan sponsors should ensure they are providing proper oversight of sponsored plans and have an understanding of the related laws and regulations surrounding employee benefit plans. Some areas of focus include the following: 1) the role as a plan fiduciary, 2) 408(b)(2) regulations and understanding what fees the plan is being charged, 3) understanding obligations when selecting a target date fund, and 4) plan operational compliance and internal controls.
Many plan sponsors are unaware of their responsibilities as plan fiduciaries. It is significant to point out that a plan fiduciary is anyone who has discretionary authority in administering and managing an employee benefit plan or controlling a plan’s assets. Therefore, fiduciary status is not based on a title; it is based on the functions performed for the employee benefit plan. This is important to note, as fiduciaries may be held personally liable.
In general, the responsibilities of a fiduciary include:
- Acting solely in the best interest of plan participants and beneficiaries, with the exclusive purpose of providing benefits to them – Exclusive Benefit Rule
- Using the same care, skill and diligence as a prudent person acting in a like capacity – Prudent Man Rule
- Following plan document guidelines (unless inconsistent with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”))
- Documenting the process for investment selection and investment-monitoring decisions
- Prudent selection and monitoring of Qualified Default Investment Alternative ("QDIA")
- Ensuring plan expenses are reasonable for the services being rendered
Certain fiduciary best practices include:
- Forming a plan oversight committee that meets throughout the year, with formally documented minutes regarding discussions and decisions
- Having a formal written Investment Policy Statement (“IPS”)
- Following the parameters set forth in the IPS, as related to investment selection and monitoring
- Following the same prudent process used to select other plan investments when selecting target date funds
- Following consistent and documented processes to monitor plan service providers
- Periodic compliance reviews of plan operations
Certain common mistakes made by plan fiduciaries include:
- Relying on non-fiduciary service providers for investment monitoring and overall investment advice
- Untimely remittance of participant contributions to the plan
- Lack of a formal process for plan investment selection and monitoring
- Limited or no oversight of plan service providers
- Not following the plan document guidelines
- Lack of awareness of plan fees
- Lack of communication to participants about fees
Plan fiduciaries should be aware of 408(b)(2) regulations, effective July 1, 2012. These regulations require the transparency of plan fees charged by covered service providers in return for the services rendered. Covered service providers include the recordkeeper, investment provider and plan advisor. Plan sponsors must receive the fee disclosures prior to paying related costs, and then determine if those fee disclosures are adequate when compared to the required disclosures as outlined in the regulation. Fiduciary responsibility outlined in ERISA includes defraying “reasonable” expenses. Prohibited transaction rules permit making “reasonable” arrangements with a party-in-interest for services, if no more than “reasonable” compensation is paid. 408(b)(2) notes that an arrangement is not “reasonable” unless 408(b)(2) is satisfied. With the fee transparency created by 408(b)(2), plan sponsors have a simplified means to determine reasonableness of fees paid within plans. 408(b)(2) creates a new prohibited transaction that should be considered for the 2012 filing year.
Another area for plan fiduciaries to consider is the fact that many participants lack the investment sophistication to build a well-balanced and diversified portfolio. The Pension Protection Act of 2006 provided an incentive to auto-enroll participants by limiting the liability of fiduciaries for directing participant money into a QDIA. Of course, fiduciaries retain the responsibility to prudently select and monitor the investment option to be used as the QDIA. The DOL designated target-date funds as one form of investment that may be used as the QDIA. Plan sponsors selecting target-date funds will benefit from implementing an objective, thorough and analytical process for selecting those funds that involves consideration of the quality of competing providers and investment products.
As a plan fiduciary there is even more to consider, as one cannot ignore plan operations and internal control. Plans must operate in accordance with the formal plan document. Internal control is a process, affected by those charged with governance – management, and other personnel – and designed to provide reasonable assurance about the achievement of the plan's objectives with regard to the reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. Plan operations may not be highly monitored by plan sponsors, given the significant amount of outsourcing; however, the ultimate responsibility for the plan and its operations cannot be outsourced or relinquished. Most operational problems occur from lack of oversight and lack of attention to governing documents and service agreements.
Certain common operational problems or “defects” include:
- Using an incorrect definition(s) of compensation that differs from that defined in the plan document
- Not following the eligibility provisions as defined in the plan document
- Not following automatic enrollment provisions of the plan
A plan sponsor can perform a self-audit, whereby the plan sponsor reviews different aspects of the plan to ensure that he or she is operating in accordance with the plan document, or can engage a third party to assist. A self-audit includes reviewing the overall policies and procedures of the plan against the plan document, testing overall plan activity , and spot-checking specific transactions at a participant level (such as contributions, distribution and loans). Performing a self-audit allows plan sponsors to be proactive with errors and prepare themselves appropriately if there is an Internal Revenue Service or DOL investigation.
In conclusion, be aware of the incredible responsibility of sponsoring a qualified employee benefit plan and of functioning as a plan fiduciary. Be sensitive to the risks related to the items outlined above and strive for formal processes and effective monitoring.
Published June 24, 2013.
