As I perform plan fiduciary governance audits, I am surprised at the continued failure of employers to take fairly simple steps that would substantially minimize employers’ fiduciary risk. Therefore, I thought it would be helpful to employers to set forth seven critical tips that employers can take to reduce potential fiduciary exposure.
Tip 1: Separate the Employer Functions from the Fiduciary Functions. Employer functions, also called settlor functions, are actions or decisions made by the employer as the employer. For example, common settlor functions are design decisions, such as establishment of a plan, the benefit formula, eligibility rules, and vesting. Settlor functions are not an exercise of fiduciary discretion and, therefore, not subject to ERISA fiduciary duties and standards. However, a fiduciary making a settlor decision may turn a non-fiduciary action into a fiduciary action. In this regard, an employer that has a committee that performs both settlor/employer functions and fiduciary functions should hold separate meetings for each function. Also do not include design or settlor functions in administrative committee minutes where the administrative committee is the fiduciary for the plan. We see this done frequently.
Tip 2: Properly Organize Your Plan’s Fiduciary Functions. Who is the plan administrator? It should not be the employer. It should generally be a committee. Have the committee members been properly appointed? Have the committee members accepted their positions and status in writing? Who is listed as the plan administrator in the summary plan description?
Tip 3: Demonstrate Fulfillment of Fiduciary Duties. This is very, very important. The court’s emphasis is on the process of fiduciary decision making, not the result. This is generally called procedural prudence. The bottom line is document, document, document. Generally, on our governance reviews we see poor and incomplete documentation. You should create detailed committee minutes that:
- Reflect decisions and reasoning.
- Point out discussions.
- Set forth recommendation of investment advisors and other vendors – yes, make your investment advisors give you their recommendation. Do not let them off the hook merely because it is ultimately your decision. Document the recommendation in the committee minutes.
- Retain documents used at meetings and meeting minutes.
Tip 4: Create a Charter for the Benefits Committee. The charter should reflect:
- Purpose, responsibilities and obligations of the committee. Make sure you keep the settlor functions out of the charter, unless you indicate that they are settlor functions.
- Meeting procedures.
- Who appoints and monitors committee members.
- The committee reviews the Form 5500.
- The committee reviews the actuary report.
- The committee periodically reviews the investment policies and statement.
- The committee periodically reviews fees.
Tip 5: Properly Manage Your TPA and Other Vendor Contracts. Do not allow your vendors to use a good faith or gross negligence standard. Require that your investment advisors agree to be fiduciaries.
Tip 6: Follow the Plan’s Claims and Claims Review Procedures. Claims and claims review procedures protect the employer and the plan. Failure to follow these procedures can result in courts approving claims that otherwise would be denied. Recognize that all of these documents are subject to disclosure in the court. When you deny a claim or claim review request, make sure that your denial has the required ERISA language in the response. Recognize that the record created on the claims and claims review process is the record that will be reviewed in court. This is an opportunity for the plan to limit the record by having a good claims and claims review procedure. Respond to document requests timely. We see employers that do not want to provide this information, basically out of spite. That is not the best approach.
Tip 7: Periodically Read Your Plan and SPD. Do your plan provisions reflect your intent? Are your plan document and SPD consistent? Recognize that the plan document controls. If you’re administering the plan contrary to the plan document, this can result in plan disqualification. Many times, we see a plan restated where the restated plan document does not carry over all the provisions of the prior plan, creating administration that is different than the plan document.