Since the beginning of the year, at least two dozen lawsuits have been filed accusing plan sponsors and other fiduciaries of plan mismanagement and breaches of their ERISA duties. Class-action suits are pending in more than half of federal district courts.
When retirement plan sponsors fail to satisfy the fiduciary standards set forth under ERISA, they can face severe consequences ranging from Department of Labor enforcement to private litigation. To defend themselves against both ERISA violations and the liabilities that follow, plan sponsors need to understand their fiduciary obligations and institute a system of checks and balances for ensuring plans operate in accordance with these requirements.
As the parties generally responsible for plan oversight, benefits committees play a central role in minimizing compliance risk. A benefits committee’s charter serves as a roadmap for plan oversight and provides evidence of the fiduciary’s intent to manage the plan prudently.
Among other things, the charter documents the delegation of responsibilities from the plan’s named fiduciary (usually the organization itself, its owner or board of directors) to co-fiduciaries (i.e., benefits committee members). The charter also defines the committee’s scope of responsibility, which should include much more than just the quarterly investment reviews commonly associated with benefits committee meetings. Here are some important, yet commonly overlooked, areas of committee oversight:
Plan sponsors and their delegates have a fiduciary responsibility to ensure plan operations are carried out effectively and consistently. Consider, for instance, all the actions that should occur as funds enter a defined benefit or defined contribution retirement plan, while funds are in the plan, and as they leave the plan. Committee oversight might uncover opportunities to improve any number of processes: from death audits to resolving uncashed checks to distributing benefits according to the plan rules. Each type of plan is subject to its own operational pitfalls, and benefits committees play a critical role in ensuring administrators maintain high operational standards.
Even with thorough preparation and training, the administration of ERISA plans will inevitably involve missteps. Errors should be documented, self-corrected and reported as appropriate following IRS guidelines. To minimize the frequency of errors, as well as the severity and duration of their impact, benefits committees should continuously monitor and hold administrators accountable for adhering to all applicable government regulations, corporate standards and plan requirements. In addition to scrutinizing administrative processes, benefits teams should be encouraged by committees to make call monitoring a vendor requirement. Regularly reviewing call center interactions can yield valuable insight into the external participant experience and uncover issues that might otherwise go unchecked.
Managing plan documents, government filings and participant notices is a mundane but essential part of ERISA plan oversight. This includes ensuring summaries of material modifications and summary plan descriptions are drafted and distributed within the required deadlines, historical plan documentation is cataloged and maintained, and plan amendments are executed and properly tracked. Bear in mind that required notices and disclosures not only must be delivered to participants in a timely manner, they also must be distributed according to electronic communications and consent rules that can vary by employee population and job description.
Compliance and testing
The IRS has various rules in place to ensure retirement and health and welfare plans do not discriminate in favor of highly compensated employees or key employees with respect to plan eligibility or benefits. The benefits committee should confirm that nondiscrimination testing is completed in compliance with IRS guidelines. Joint ventures and corporations with subsidiaries must include all employees across the enterprise in certain nondiscrimination testing, regardless of their eligibility for any specific plan. These “controlled groups” add a layer of complexity to the testing, increasing the need for diligent oversight. Part-time employees and leased employees also create challenges, as they too must be carefully accounted for under the testing rules.
Benefits committees play a vital role in preparing plans for corporate or legislative changes that could impact plan operations, administration, documentation and/or compliance. For example, since benefit plans must be considered among the assets and liabilities that change hands in an M&A transaction, mapping out the options ahead of time will help ensure purchase agreements comply with successor plan rules and deliver expected outcomes for the plans and their participants.
Because of a benefits committee’s diverse responsibilities, its members should represent a broad array of corporate functions. Plan sponsors also may benefit from engaging an independent consultant to take a fresh look at governance practices and confirm that all required activities are being addressed in a holistic and proactive manner. In all cases, ensuring benefits committees are empowered and equipped to govern plans is essential to fulfilling plan sponsors’ fiduciary duty, maintaining smooth plan operations and delivering a positive participant experience.