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Thelen Reid Brown Raysman & Steiner LLP
Class
action attorneys have discovered employee benefit plans.
Company officials, known as fiduciaries, with responsibility
for a plan, including 401(k) plans, other retirement plans
and self-insured welfare plans, are fair game for plaintiff's
lawyers. Employers and fiduciaries should take steps to
minimize the risk of liability, and a good first step is
a fiduciary liability review.
ERISA,
the federal employee benefit law, imposes a high standard
of duty and care on fiduciaries to find and fix poor administrative
practices that directly or indirectly result in lost benefits.
Tax laws require careful plan administration to maintain
tax exempt status. Even if questionable plan practices might
have been ignored without consequence in the old days of
a booming economy and 30 percent annual returns, things
have changed. Enron, WorldCom and all the other corporate
scandals, along with generally negative economic news, have
resulted in greater government and employee scrutiny. Employers
should review how their plans are managed and fix any problems
before class action lawyers discover them. Problem areas
may include:
Fees.
The retirement plan vendor industry is very competitive,
with lots of capacity. Often, vendors offer low fees when
asked. Many fiduciaries, however, are unaware of all the
fees and commissions paid by the plan or its participants,
or they accept higher fees than are necessary or reasonable.
Fiduciaries often feel overwhelmed by the complexity of
searching for a new vendor, hesitate to risk problems caused
by change and sometimes overlook the evaluation of fund
management fees. Incumbent vendors cheerily take advantage
of that inertia by collecting fees, often from less-than-obvious
sources, that do not justify the level of service or fund
performance.
Investment
Performance. Many benefit plans have experienced poor
investment returns in the last few years, but some have
performed far worse returns than others. Inattentive fiduciaries
with poor investment results are sitting ducks for plaintiff
lawyers. These lawyers will try to build a plausible case
that more and better monitoring of investments might have
produced better returns. The fiduciary's defense is an adequately
documented investment process that includes unbiased expert
assistance, when appropriate. Anything less is an invitation
to a class action lawsuit.
Company
Stock. Allowing employees to invest their pension account
in the employer's own stock carries additional risks for
all parties. If the company fails, the employee may lose
most or all retirement benefits along with a job. The finger
often is pointed at plan fiduciaries who, it will be claimed,
knew or should have known of the company's real predicament
and should have alerted employees to sell company stock
or at least not buy any more. Responsible fiduciaries should
understand their obligations to employees and how they should
conduct themselves if the company's situation deteriorates.
Documents
and Disclosures. All plan documents, including summary
plan descriptions and investment guidelines, should be reviewed
periodically to assure that they conform to changes in the
law and best industry practices and that they are consistent
with actual operating procedures. Documentation should be
maintained to "prove" that all required notices
(there are many) have been distributed in a timely manner.
Failure to observe these "formalities" exposes
a fiduciary to unnecessary risk and provides an easy target
for a plaintiff trying to present a fiduciary as not doing
its job.
Plan
Administration. Plans are subject to complex Tax Code
rules that change constantly. Mistakes occur, such as improper
contributions and distributions or uncorrected discrimination
test failures. The IRS has developed a flexible program
for correcting mistakes without losing tax qualification
although a favorable outcome is available only if the employer
finds and corrects a mistake before the IRS discovers it
on audit.
Simple
Steps. To minimize these problems, employers and other
plan fiduciaries should:
- Ensure
that the plan's fiduciaries have an appropriate background
for the task.
- Review
vendor contracts annually and request proposals from outside
vendors every three years.
- Identify
every revenue source from which the plan vendor is paid
and compare with proposals submitted by other possible
vendors.
- Conduct
regular fiduciary committee meetings at which plan investments
are reviewed and other plan matters are discussed. Keep
accurate meeting minutes.
- Analyze
whether fees charged by professional managers and investment
funds are justified by superior investment performance.
- Avoid
relying primarily on investment information from a vendor
with a financial interest in the investments. Ask the
vendor if it receives fees that are not disclosed to the
employer.
- Clearly
outline responsibilities in the plan documents, trust
documents, contracts, summary plan descriptions and board
resolutions.
- Correct
administrative errors as soon as possible after they are
found and carefully consider official guidelines published
by the Internal Revenue Service.
- Communicate
clear plan claims procedures that comply with current
law.
- Obtain
appropriate liability insurance coverage for plan fiduciaries
and ensure that the plan's fidelity bond is adequate and
paid up.
- Develop
clear fiduciary procedures and "what if" strategies
to assist fiduciaries responsible for plans containing
employer stock.
Although
it may sound like a big project, most of these tasks are
simple steps that do not require enormous effort. Unfortunately,
many fiduciaries just don't get around to doing what's necessary.
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For more information about the issues covered in this report, please contact David S. Foster in our San Francisco office at 415-369-7020 or at dsfoster@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2003 Thelen Reid Brown Raysman & Steiner LLP
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