The Latest Word in Employee Benefits . . .

DOL WORKING HARD IN THE ATLANTA AREA

TO FERRET OUT FIDUCIARY BREACHES

     We have been retained recently by a few different clients in the Atlanta area to represent them in regard to an investigation by the U.S. Department of Labor (DOL) of their retirement plans.  These clients have undergone a review process spanning several months, which has resulted in a lengthy letter from the DOL investigator as to possible charges of fiduciary breach or mismanagement of the plans by the fiduciaries.  Some of these charges are quite unusual in nature, and many arguments can be made that the actions taken by the plan sponsor or administrator are not fiduciary breaches at all.  Furthermore, many of the issues simply stem from the fact that small plans operate differently than large plans, and the concerns of the DOL seem inappropriate in a small plan setting.  We have spoken with professionals elsewhere in the country, and it appears that the Atlanta regional office is more active about these issues than other parts of the country.  Nonetheless, it is quite concerning, and plan sponsors and service providers everywhere should take notice.

     While you may think that these examinations involve only significant bad actors or large plans, our current experience reflects that the plans at issue are quite small (often only 3 - 5 employees) and are managed with various levels of attentiveness by the professional owners of the companies.

    
     Issues that have arisen include:

• Lack of proof of investment policies and procedures.  In our client’s situation, the plan is trustee-directed and the owner of the company is the trustee.  Therefore, an investment policy amounts to an instruction by the owner to himself. 

• Lack of written demonstration that the sponsor or trustee has engaged in periodic reviews of service providers to ensure that their services are effectively undertaken at a reasonable cost.  This situation involves a TPA who was paid by the company, not the plan.  While it makes sense that the services should be monitored for effectiveness, the “reasonable cost” part is not an ERISA issue when the plan does not pay the fees.

• Participant loans, particularly to the owners, that were not taken according to the participant loan program or were subject to default for failing to repay on a timely basis.  The DOL is claiming in one situation that a business owner’s failure to repay a participant loan timely is a fiduciary breach and, in another case, that a failure to take affirmative action to collect payments from a rank-and-file participant who was on extended paid leave due to sickness was a fiduciary breach.  All loans at issue are directed investments of the participants’ accounts.

• Failure to document and obtain annual valuations of non-stock-exchange investments, such as limited partnerships and real property.  This issue particularly concerns the DOL because so many plan sponsors are cavalier about getting valuations and appraisals of their illiquid investments.

• Failure to properly maintain the required fidelity bond.  Plan sponsors and administrators must be sure to be in compliance with bonding rules.  Often, the failure to be sufficiently bonded requires the plan to be audited annually by a CPA.

     Furthermore, the DOL is particularly frustrated when it takes the plan sponsor or trustees a long time to produce requested documents.   Under benefit plan rules, a plan sponsor has a legal obligation to provide information to the DOL when requested.  In some cases, the DOL is alleging that the sponsors at issue violated ERISA for not having or providing records.

     We bring this to your attention so that you can take steps before, during, and after you experience such an examination, to avoid expense and liability.

     Our Recommendations:

     1.   If you receive an examination notice from the DOL, work with a professional (TPA, lawyer, accountant) to produce the information requested and to identify areas where a problem might arise.  The DOL takes these reviews very seriously; you should too. 

     2.   If the DOL’s examination produces a long letter of purported violations, get legal counsel to review the charges and to formulate a response.  The DOL is not necessarily correct in its allegations.  Nonetheless, you need a carefully crafted, legally based response.

     3.   On a preventative basis, be sure to:

• Keep records of actions you take to hire and supervise service providers, so that you can demonstrate proper procedure.  Procedure is paramount under the fiduciary rules, and demonstrating that you followed a proper procedure requires that you document the things that you do at the time that you do them.
  
  
  
• Keep records of the review process for the various investment options, so that you can demonstrate that you have fulfilled the obligation to properly maintain the funds.  Again, being able to show that you took proper action is very important.

   

•  Review the performance and pricing of service providers every few years.  This may mean “bidding out” the services.
  
  
• Make sure your fidelity bond and asset valuations and appraisals are up to date.