|Since the collapse of Enron and the passage of Sarbanes-Oxley, outside scrutiny of fiduciary conduct has greatly increased. From now on, it is clear that you must identify and actively manage your fiduciary risk. Let’s take a look at the ten biggest mistakes fiduciaries make and challenges they face in their governance of retirement plans. All of these mistakes can lead to personal liability for fiduciaries in the event of litigation
1. The Retirement Plan Has No Clear Purpose
Can you identify any long-term project in your company, in which millions of dollars are involved and huge financial risk is present, where the people responsible for the project cannot articulate its purpose?
What is your plan’s purpose? Most retirement plan sponsors have never identified a purpose for their plans although ERISA requires it.
Ask each member of your Plan Administrative Committee to write down the Plan’s purpose on a piece of paper. Can you be assured that everyone is on the same page? If plaintiff’s counsel put you through this exercise how well would you fare?
2. Not Applying a Prudent Investor Standard of Care
One of ERISA’s fundamental Rules requires that retirement plan fiduciaries know how to apply institutional investment management principles and processes to the management of the plan’s assets. Prudence alone as an element of one’s character is insufficient to guide a fiduciary’s conduct. Ask each member of your Plan Administrative Committee to write down the difference between a “Prudent Man” and a “Prudent Investor standard of care?” Again, if plaintiff’s counsel put you through this exercise how well would you fare?
Fiduciaries often believe that their good intentions will carry them through any accusation of wrong-doing. Unfortunately, that belief is not rooted in legal reality. The Fifth Circuit court summarized the issue well when it said “…a pure heart and an empty head are not enough”.
3. Lack of Appropriate Fiduciary Training
Fiduciaries take on significant responsibilities, yet very few receive the appropriate training to do the job. Fiduciaries that have learned about retirement plan management from working with their investment managers may fail to guard against conflicts of interest non fiduciaries bring to the table.
Can you point to any other long-term project which involves millions of dollars in assets, for which your company did not provide training to the people responsible for the success of the project?
4. No Assignment of Responsibility, Accountability and Authority
No seasoned business executive would operate without holding subordinates accountable for the fulfillment of their responsibilities. However, many retirement plans are managed without fiduciaries being formally identified and assigned specific statutory responsibilities.
All too often, there is a vague sense that all Committee members are responsible for everything. The result is confusion, redundancy and ineffectiveness. Without individuals being accountable for specific statutory duties the retirement plan will continue to suffer from the effect of ambiguous governance processes. Your fiduciary liability increases when accountability in plan governance is absent or ineffective.
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5. Allowing Consumerist Influences to Override Sound Fiduciary Judgement.
Companies spend a lot of money each year in branding. Vendor marketing strategies have had an overwhelming influence on the development of the retirement plan industry.
It is the duty of every fiduciary to understand the business relationship service vendors have with the Plan. It is their job to serve as a guardian of the plan participant’s best interests. They must not allow the influence of these massive branding efforts to relax the fiduciary vigilance that plan participants deserve.
6. The Lack of Focus on Risk: Investment and Plan Risk
Fiduciaries do not focus sufficient attention on various elements of risk. They tend to examine and overemphasize historical investment performance instead.
For example, while many Plan Sponsors are aware of the requirement for investment diversification they are unaware that asset allocation guidelines in an increasing interest rate environment are very different from those guidelines an institutional investor would have emphasized in the interest rate environment of the 1980’s and 1990’s.
At the Plan level many Sponsors assume that their record keeper is responsible for the plan’s operational compliance. They do not examine operational compliance although it is a statutory requirement. More importantly, failure to ensure the plan’s operational compliance will lead to a violation of Sarbanes Oxley requirements for internal control verification and testing. Such violations carry criminal sanctions.
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7. Appointing Fiduciaries not Fullfilling their Monitoring Function
Appointing fiduciaries, usually members of the Compensation Committee of the Board or the Board in its entirety, have ongoing monitoring responsibilities for your ERISA retirement plans. The failure of appointing fiduciaries to monitor the Plan Administrative Committee’s conduct will leave those appointing fiduciaries vulnerable to personal liability for fiduciary breaches by the Committee.
8. The Lack of Rigorous Parties-in Interest Monitoring
Fiduciaries have a duty to know about any payments made from Plan assets. They must know who receives such payments, how much they received and what service or product was obtained. They have a duty to determine if such payments are reasonable in light of the services or products provided. Failure to identify the self interest of plan vendors is the first step in failing to understand all costs to the plan and the plans participants. Such a failure is a clear violation of the duty of loyalty which fiduciaries have to plan participants.
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9. Improper Understanding of ERISA Counsel
Fiduciaries often fail to understand whose interests are represented by their ERISA counsel; the plan sponsor, or the plan. The advice provided by ERISA counsel will be significantly affected by who they represent. Furthermore, most retirement plan fiduciaries do not understand the implication of the ERISA preemption of the attorney - client privilege. With very few exceptions, it is a mistake to think that your discussion with ERISA counsel is undiscoverable during litigation.
10. Failure to Document
The documentation of your fiduciary conduct is the basis for your defense against claims of malfeasance and breach of duty. Failure to provide adequate documentation of prudent fiduciary processes allows plaintiff’s counsel room to weave a tale of misconduct. It is a grave mistake.
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