Increased Litigation Heightens Awareness of Fiduciary Responsibility Over Qualified Retirement Programs, According to Towers Perrin Study

STAMFORD, CT, December 2, 2008 — While a majority of board of directors or board-level committees retain responsibility for appointing fiduciaries for qualified plans, an increasing number are choosing to delegate that responsibility to company executives and internal plan committees amid rising liability concerns, according to a survey conducted by global professional services firm Towers Perrin. 

As indicated in Towers Perrin's 2008 Survey on Qualified Retirement Plan Governance, 54% of respondents from U.S. companies said selecting a fiduciary is the responsibility of a board member.  This compares with 71% the last time the study was conducted in 2005.

Under Employee Retirement Income Security Act (ERISA) guidelines, whoever appoints a fiduciary has a duty to monitor the appointee for continued compliance and faces potential liability in the event that the appointment of the fiduciary is questioned.  Towers Perrin recommends that a sponsor consider having legal counsel examine whether the board or a board committee making fiduciary appointments may in fact increase the organization's liability risk by making it potentially more likely that the board or board committee — and quite possibly the organization itself — may be named as a defendant in an ERISA lawsuit.

The wide-ranging and comprehensive responsibilities of a typical board or board committee may result in too little attention being paid to the duty of fiduciary monitoring.  This scenario can increase the potential for liability and make it possibly more difficult to successfully argue for the suit's dismissal, at least with respect to the organization or the board, according to Lisa Alkon, a Principal in Towers Perrin's Retirement practice and co-author of the report.

"Acting as an ERISA fiduciary carries with it the potential for civil liability," said Ms. Alkon.  "With the rise of lawsuits and regulatory actions, it is only prudent for directors and their organizations to take certain defensive measures that start with plan governance."

Further, both the Internal Revenue Service's (IRS) and Department of Labor's (DOL) scrutiny of compliance violations in the management of many benefit plans is reinforcing the need to regularly evaluate operational compliance.  While 37% of respondents say their companies review operational compliance of qualified plans annually, an astounding 21% note their firms hadn't — or weren't aware if they had — performed the review. 

Finally, when it comes to review of 401(k) fees, nearly half of the survey respondents (47%) say they look at them once per year.  This high response rate may in fact suggest companies are concerned over lawsuits being pursued against many large employers and service providers over 401(k) fees, said Ms. Alkon, who also noted that may also mean that a cursory review is undertaken each year, but does not indicate that a detailed review is completed annually.

As fiduciary appointments and decisions must be monitored for continued satisfaction of ERISA requirements, monitoring will typically require, among other things, reviewing reports. Twenty-nine percent of respondents say that the board or a board committee reviewed reports from benefit committees on an annual basis — the same percentage who note they reviewed reports "as needed."  Seventeen percent said they reviewed those reports quarterly, while 14% indicated they didn't know how often benefit reports were received and reviewed, which indicates a "possible weakness in monitoring procedures," according to Ms. Alkon.

While neither ERISA nor the DOL provide specific guidelines on sound and effective plan programs, many firms are adopting plan governance best practices to avoid legal action, including the development and implementation of systematic training processes for their fiduciaries, asserted Ms. Alkon.

The survey results indicate that, although great strides have been made in fiduciary training since the initial survey, conducted in 2004, organizations still have work to do to get their fiduciaries fully up to speed.  While 41% of respondents said that "all" of their fiduciaries have undergone training, 31% said that only "some" have.  And 28% of organizations either have fiduciaries that have not been trained or don't know if they have received training.  The 2004 survey found that 39% of organizations indicated their fiduciaries had received training, and 61% had either not provided training to their fiduciaries, or didn’t know.

Nearly three-fourths of respondents said their organizations carry a separate fiduciary liability policy, or a rider to their Directors and Officers or Errors and Omissions liability policies, a sign that companies are acutely aware of potential exposures in this area.

"While we are in a challenging climate, fiduciaries should not be alarmed or discouraged by the increased attention from employees, regulators and other stakeholders," Ms. Alkon said.  "There are many actions they can take to minimize risk, while protecting the interests of their employees."

In addition to enhanced training programs, Ms. Alkon recommends:

• establishing, documenting and maintaining a clear and appropriate plan governance structure
• having — and following — written procedures
• ensuring plan documents and other supporting documentation are consistent and current
• performing, at least periodically, an operational compliance review of all benefit plans
• maintaining and periodically revisiting fiduciary insurance policies.

About the survey

A total of 126 respondents participated in the Web-based survey, conducted in June.  Two-thirds of those surveyed are from companies having between 2,500 and 50,000 employees; 86% are from parent companies headquartered in the U.S.