August 26, 2020 – For several years we’ve witnessed a growing volume of litigation related to employee benefit plans. According to a Bloomberg Law analysis, ERISA class settlements in employee benefit disputes hit $449M in 2019, up significantly from 2018 ($291M) and nearly reaching 2017 levels ($559M).  These lawsuits have gained mention in the news, the web, and even television commercials with attorneys seeking retirement plan participants whom believe they’ve been “harmed”.  Recently, the AICPA noted this trend in their Risk Alert for Employee Benefit Plans.  They cite the subject of the lawsuits to include the following:

• Unreasonable fees charged;
• Failure to monitor fees charged to participant accounts;
• Improper investment options;
• Failure to monitor investment performance; and
• Plan oversight bodies have not operated for the exclusive benefit of the participants.

According to the IRS, a fiduciary is a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity. The IRS defines basic fiduciary responsibilities to include the following:

• Acting solely in the interest of the participants and their beneficiaries;
• Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
• Carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters;
• Following the plan documents; and
• Diversifying plan investments.

The responsibility to be prudent covers a wide range of functions needed to operate a plan. Since the fiduciary must carry out these functions in the same manner as a prudent person, the IRS indicates it may be the fiduciary’s best interest to consult experts in such fields as investments and accounting.  Hiring an expert can help reduce the fiduciary’s liabilities but it does not completely eliminate all responsibilities and liability. The IRS provides the following list of items to consider in selecting a plan service provider:

• Information about the firm’s affiliations, financial condition, experience with 401(k) plans, and assets under their control;
• A description of how the firm will invest plan assets or how it will handle participant investment directions, and its proposed fee structure;
• Information about the identity, experience, and qualifications of the professionals who will be handling the plan’s account such as:
  •  Any recent litigation or enforcement action that has been taken against the firm;
  • The firm’s experience or performance record;
  • Whether the firm plans to work with any of its affiliates in handling the plan’s account; and
  • Whether the firm has fiduciary liability insurance.
• Once hired, these are additional actions the fiduciary should take when monitoring a service provider:
  • Review the service provider’s performance;
  • Read any reports they provide;
  • Check actual fees charged;
  • Ask about policies and practices (such as trading, investment turnover, and proxy voting); and
  • Follow up on participant complaints.

These recent trends in litigation highlight the importance of documenting your actions of fiduciary oversight.  A documented investment policy can be used as a tool to prudently monitor the investment line-up.  Plan fiduciaries should also document oversight by regularly meeting to discuss relevant matters and documenting the minutes from these meetings.  We recommend this documentation to include matters such as the following:

• Date, time and location of the meeting;
• Identification of the people present at the meeting;
• Reference to any investment reports used during the meeting;
• Participation issues such as education, goals for increasing the number of participants, or deferral rates;
• Plan fee matters including benchmarking for reasonableness and 408(b)(2) service provider notice compliance;
• Fund performance matters including benchmarking, decisions to place a fund on a formal or informal “watch list”, and decisions to replace/add a fund to the line-up;
• Consideration and approval of amendments to the plan document;
• Evaluation of service providers, including a review of SOC 1 reports obtained from service providers and considerations of end-user controls;
• Employee/participant complaints or concerns, if known;
• Compliance with ERISA regulations; and
• Party-in-interest transactions and considerations.

This article is an excerpt from Dopkins Employee Benefits Newsletter.  To read the complete content, please click here.

For more information, please contact Tyler Owen at towen@dopkins.com.

About the Author

Tyler M. Owen CPA CFE

As a member of the Assurance Services team, Tyler provides assurance and consulting services to clients from a diverse group of industries, providing management with critical information to help them improve their organizational fiscal controls