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Monday, June 6, 2016

Gavel and ScalesIt was bound to happen. For several years, the plaintiffs’ bar has sued fiduciaries of large 401(k) plans asserting breach of their duties under ERISA by failing to exercise requisite prudence in permitting excessive administrative and investment fees.  It may be that the plaintiffs’ bar has come close to exhausting the low-hanging lineup of potential large plan defendants, and, if a recent case is any indication, the small and medium-sized plan fiduciaries are the next target.  See, Damberg v. LaMettry’s Collision Inc., et al. The allegations in this class action case parallel those that have been successful in the large plan fee dispute cases. Now that the lid is off, small and medium sized plan fiduciaries should be forewarned of the need to employ solid plan governance to avoid, or at least well defend, a suit aimed at them.

Exceptional plan governance means that, at a minimum, plan sponsors (and designated fiduciaries) should consider the following items to help demonstrate that they are primarily operating their plans to the benefit of participants and their beneficiaries and then to reduce liability exposure for themselves:

  • Understand and exercise procedural prudence – process, process, process
  • Identify plan fiduciaries and know their roles and duties
  • Seek and obtain fiduciary training for all plan fiduciaries
  • Adopt a proper plan committee charter or similar document
  • Appoint fiduciaries and retain service providers prudently and monitor them
    • Know the difference between a 3(16), 3(21) and a 3(38) fiduciary and make prudent decisions with respect to retaining them
    • Utilize a qualified administrative committee of no fewer than three members that meets regularly and memorializes its decisions properly
  • Utilize a corporate trustee/custodian
  • If you adopt an investment policy statement (as you probably should), follow it
  • Understand and properly evaluate plan fees and 408(b)(2) disclosures and services and service contracts
  • Monitor plan administration
  • Memorialize actions taken and the reasons for doing so
  • Retain a qualified independent investment advisor (although it may not make financial sense for small plan sponsors to pay for this service)
    • Engage in periodic comparisons of fees and services being charged for similar plans (RFPs, RFIs, benchmarking)
    • Address participant concerns promptly and, if necessary, seek advice of counsel in responding to participant complaints
  • Understand and evaluate a proper operational structure for your plan
    • Know the difference between a bundled structure and an unbundled one – with a really good record keeper
    • Appreciate the nature of services to be provided
    • Evaluate cost to participants and reasonable of fees for needed services
    • Determine cost that the plan sponsor is willing to share
    • Identify parties that will be making statements regarding the plan and its operation (like the plan’s TPA) and how there is control to avoid misstatements
    • Determine responsibility for keeping plan documents current and confirm that it is ongoing
    • Determine responsibility for claims processing and confirm that it is ongoing
  • Verify that a proper ERISA bond is in place
  • Procure fiduciary insurance
  • Seek assistance of counsel as needed
  • Evaluate the investment platform regularly, and, if a brokerage window is made available, be certain to understand it, how it works, and what its limitations might be
  • Assure 404(c) compliance, if applicable
  • Understand target date funds and how they work in your plan
  • Establish solid internal controls
    • Review current systems to confirm segregated responsibilities and that the IT systems being used for the plan (particularly payroll) are effective
    • Confirm that those maintaining plan records are knowledgeable
    • Confirm “good transfers” regularly
    • Make certain that the proper definition of compensations is being used for example, by reviewing payroll coding against the plan document
    • Be certain someone is responsible to verify data, particularly for nondiscrimination testing

While this list does not address every possible governance practice, following the applicable items appropriately should result in good plan governance. It will also be of value to your participants by demonstrating that you have their best interests at the forefront of plan operation. Additionally, the result should be better liability protection for you and the other plan fiduciaries. While the list may seem daunting, once you understand each of the steps and implement them, it will become easier and, with regularity, can become second nature.


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