In these uncertain economic times, how do fiduciaries of retirement plans protect themselves against claims by plan participants for losses incurred in the stock market and other investments?
Fiduciaries have very strict legal duties placed on them due in large part to the fact that they are managing other people’s money. If they fail to meet these duties, they can be held liable for any losses that result from such a failure, says Douglas S. Neville, an officer and the practice group manager of the employee benefit practice group at Greensfelder, Hemker & Gale, P.C.
“Lately, we have seen increased awareness among fiduciaries about these duties,” Neville says. “When plans are making money during good times, there are fewer complaints about how the plans are being managed. But when plan participants start seeing large losses in their plan accounts, complaints start coming in.”
Smart Business spoke to Neville about how fiduciaries can be sure they are following their duties.
In a tough economic landscape, is the appearance of more losses enough to trigger concerns about the fiduciary?
Not necessarily. The fact that there are more losses during difficult times is just a reflection of the overall economy. In a sense, losses are to be expected during such times. Fiduciaries of a plan with losses during such times may be doing everything correctly in terms of their duties.
The problem starts when participants start seeing losses that impact their own personal situations. These situations may cause the participants to start questioning the plan fiduciaries about how they have been managing the plan. While the fiduciary may have been doing everything the right way, there is the possibility of increased scrutiny. That is why it’s very important that plan fiduciaries review their activities with respect to the plan in order to ensure that they are fulfilling their fiduciary duties, and if any deficiencies are identified, they should be addressed immediately.
What are the signs of fiduciary misconduct?
Although misconduct can certainly be a problem with management of plans, in most circumstances involving fiduciary breaches, the plan fiduciaries simply fail to properly perform their duties, as opposed to engaging in some overt wrongful act.
The first problem that some plans have, especially in smaller businesses, is that the plan fiduciaries are not really qualified to serve in that position. If the people running the plan don’t have the background to be dealing with such matters, then we will always recommend that they find professionals who can help manage the plan.
Lack of formal documents relating to fiduciary decisions can also be a problem. It is important that a retirement plan have an ‘investment policy’ that is used to guide the decision-making process related to plan investments, and decisions should be documented. If there is more than one person making the decisions, the fiduciaries should hold regular meetings to review the status of plan investments and keep records of these meetings. Plans in which such records are lacking are more likely to have a problem than plans with thorough documentation.
Lack of communication with participants may also be symptomatic of a problem, especially where there is a request for information and the response is not forthcoming. In some situations, lack of information about a plan could point to actual misconduct, as opposed to simply failing to fulfill the fiduciary duties.
How can a fiduciary cover itself when there is so much inherent risk?
The most important thing a fiduciary can do is engage in a process designed to promote the financial interests of the plan and its participants. This requires that the fiduciaries regularly review the status of the plan and its investments and determine whether any adjustments are required. In doing so, fiduciaries should engage competent financial advisers to assist with the analysis and ask questions of any financial advisers that they engage. Rather than blindly relying on advice of such advisers, plan fiduciaries should critically review and scrutinize such advisers, analyses and recommendations. In the event of a claim against the fiduciaries, it is important that they be able to show that they gathered all the information necessary to make an informed decision.
Fiduciaries should periodically examine whether they are qualified to serve in such a capacity. As a plan grows and becomes more complex, sometimes it can ‘outgrow’ the qualifications of the fiduciary. Finally, plan sponsors and fiduciaries should ensure that fiduciaries are covered by fiduciary liability insurance. It is important to carefully review such policies to ensure that the amount and legal terms of the coverage are adequate.
DOUGLAS S. NEVILLE is an officer and the practice group manager of the employee benefit practice group for Greensfelder, Hemker & Gale, P.C. Reach him at (314) 345-4742 or firstname.lastname@example.org.