When faced with such a question, few plan sponsors – and the executives appointed to be Plan Administrators – seem able to answer it with any confidence. As fiduciary consultants we often find that those who feel positive about their status are likely to overestimate their level of protection. Many Plan Administrators operate unaware of what truly creates risk within their plan dynamics. Unfortunately, we experience this every day. There are a number of reasons why this is the case – why plan sponsors remain unaware of the level of risk within their plans.
Misplaced Trust
Many plan sponsors believe that because their retirement plans employ a recordkeeper, a third-party administrator (“TPA”), a custodian, and an investment advisor, – with a fidelity bond and fiduciary liability insurance in force, too – that they are protected. They reason, someone has it covered. Many plan sponsors believe their vulnerability rating to be very low – or zero. But here is an interesting consideration. The industry has long operated with recordkeepers, TPAs, custodians and advisors, as well as various forms of business risk insurance.
If these resources are sufficient to protect plan sponsors – why are plan sponsors still getting sued and suffering significant losses?
Why Plan Sponsors are Vulnerable
A quick google search will provide you a host of industry articles citing many of the key reasons that qualified plans are vulnerable. From loan errors, untimely contributions and late minimum distributions, to compliance risks such as failing to monitor vendors, failing to ensure conformance to governing plan documents and policies, or failing to activate safe harbor exemptions that insulate against prohibited transactions – every single retirement plan will, at one time or another, experience such errors. The thing is, when a plan’s time comes, it won’t be just one thing. When an audit or investigation occurs – when one small oversight is detected, which likely EVERY plan will experience – the house of cards will fall. Every oversight will come to light. In most cases, two parties, the plan’s sponsor and the Plan Administrator, will stand alone and be liable.
ERISA litigation is typically initiated from one of two sources – the random Department of Labor audit and the anonymous employee complaint. These are situations beyond our control. The outcome, however, is not. Plan fiduciary protection, plan sponsor protection, and plan asset protection – is entirely within our control.
Here is a list of the most common and costly vulnerabilities:
Loans and distributions – Most recordkeeping systems automate the loan and distribution request process. In some cases, plan sponsors are still required to authorize or sign off on such requests. They may do so in writing or sometimes with the click of a button on a website. In other cases, their recordkeeper or TPA will agree to offer a “fiduciary service” that includes distribution authorizations. While this appears to be a fiduciary service – offering some liability relief – read the fine print in the service agreement. Nine times out of ten, if any error is detected, the service provider will NOT assume responsibility. This includes obtaining spousal consent when required for a participant distribution. The Plan Administrator is responsible for monitoring the distribution services (and every other service) offered by the service provider. The responsibility for any error of commission or omission will fall upon the Plan Administrator.
Eligibility tracking – Most recordkeeping systems provide automated eligibility tracking. Employee census and payroll information is submitted through contribution files, and eligibility is tracked and reported on the recordkeeper’s website using hire dates and eligibility features as stated in the plan document. That data will then be used to confirm vesting in the event of a distribution request. This is another pseudo fiduciary service that many service providers will offer, but take note – there is no liability relief. Service providers cannot control a company’s census and payroll data. If bad data goes in, bad eligibility and vesting is likely to come out and if it does, the Plan Administrator stands alone in the line of fire.
Plan document updates – A plan sponsor hires a TPA to write and manage their plan document. On occasion, when there is a legislative change, a document must be updated to include new provisions. In some cases, a TPA will automatically perform the update and will often charge a fee for their time. In some cases, this is not done automatically. Emails may be sent to a plan contact, asking if the service is desired and often to request the fee be paid up-front. Ensuring plan documents are up-to-date with federal law is NOT the responsibility of the third-party administrator. If a required document change is not performed, not performed within legal time limits, or not signed when required by the Plan Administrator, the Named Fiduciary will stand alone for the oversight.
Required minimum distributions (“RMD”) – Like many other aspects of plan operations, the timely management of RMDs relies upon complete and accurate data from the sponsoring company. Some recordkeeping systems may automate this process. Flags may be built into the website to alert a plan contact when such a distribution is required but this automation is NOT built into every recordkeeping system. If not, it is up to the Plan Administrator to track the details so that when a participating employee reaches 70 1/2, the minimum distribution is processed appropriately. But keep in mind, even if a recordkeeping system automates this process, if there is bad data in the system that affects when a participating employee reaches 70 1/2, or if the system fails and a distribution is not performed at all or on time, or if the Plan Administrator doesn’t authorize the distribution in a timely manner – the liability for any error or omission falls solely upon the Named Fiduciary.
Contribution submissions – The Department of Labor takes the timeliness of contribution submissions VERY seriously. Why? Because as soon as participants’ contributions are segregated from general corporate assets, their money could start working for them. And since a plan is established for the exclusive purpose of providing benefits to participants and their beneficiaries – that should be a top priority. Today, the DOL might “allow” a 7 day grace period, HOWEVER, if a plan sponsor’s administration and payroll processing has the ability to respond more quickly, the DOL will assume that it COULD happen in three days or even one day. The DOL’s determination of the grace period is based on its assessment of how soon contribution processing COULD happen. As soon as it COULD happen – it better happen – unless there is a justifiable and documented problem that causes a delay. In addition, if a recordkeeper is delayed in processing, while they might agree to cover some of the loss to participants, again, the Plan Administrator is required to monitor service providers and plan operations. If a plan is audited or investigated and the DOL catches an unaddressed contribution submission or processing delay – the liability will fall upon the Plan Administrator.
Plan fees – Fee related issues are quickly becoming #1 on the list of “things that will get a Plan Administrator in hot water.” There are two key oversights related to plan fees. First – often done in an effort to avoid writing a check, the plan sponsor will charge an expense to plan assets that is not eligible to be deducted. Second – fees charged to plan assets are deemed unreasonable. This can be related to investment expenses, service provider fees/compensation or an ineligible deduction as noted above.
When plan sponsors find themselves in a challenging audit or worse, a DOL investigation, they naturally start reaching for life preservers namely, all of their service providers. Sadly, when it comes to ERISA litigation, few resources will be left standing beside them. Here is why. In most cases the service provider role, and their subsequent liability if something should go wrong, will be strictly limited by their service agreement – even if they are acting in a self-described “fiduciary” capacity. In most cases, if something goes wrong, the bulk of liability still falls upon the plan sponsor (Plan Administrator). As cited above, the Plan Administrator owns the responsibility to monitor service providers – so if they didn’t catch it – and you didn’t catch them – guess who is liable?
