Picking your infield - your first line of defense...
With retirement plans, as in baseball, having a strong infield will be the key to your defensive success. This is where the majority of the plays are made — by the in-house players (or "infielders") of the employer as either representatives of the employer/plan sponsor or as named fiduciaries of the plan. The named Plan Administrator, the Trustee or Trustees, and the members of the Administrative Committee, if you have one, will be faced with play-making decisions every season (plan year). However, if your infielders can't handle the ball well, turn a double play or field a bunt, runs will be scored against you in the form of IRS and DOL penalties, participant claims or, heaven forbid, an IRS audit or a Department of Labor enforcement action.
So what kind of sloppy play should you be aware of? In a nutshell, many retirement plans, whether they are large employer plans or small employer plans, fail to properly identify the players, their positions, and their duties to ensure that their responsibilities are being carried out under the terms of the plan and in conformance with ERISA. It is typical to find board members, officers, human resource personnel and even the entities sponsoring the plans exposed to liability for actions that they were unaware of. It is critical that the named fiduciaries (i.e., the Plan Administrator or Administrative Committee and Trustees) are properly appointed, that appointments are accepted, and that it is clear who can act and in what capacity. Ministerial versus fiduciary functions need to be clearly delineated and the procedures for handling both categories of decisions must be clear.
Consider these examples:
- The pervasive use of prototypes and boilerplate plans with their untailored fiduciary provisions, often results in committees not being named. This leaves the sponsor-entity, and in turn, the board of directors, exposed to personal liability for fiduciary acts. Arguably, this can be an even bigger problem in the case of a partnership sponsor, due to unlimited general partner liability concerns.
- The board of directors may be surprised to find that they are liable as fiduciaries for failing to act in an affirmative fashion when dealing with plan administration and fiduciary decisions, including overseeing investment advisors and agents.
- Human resources personnel may over-assume responsibility and take on responsibilities that are actually fiduciary actions as opposed to ministerial functions. Is the HR person a named fiduciary? Should the HR person be a named fiduciary or be a member of the Administrative Committee?
- Fiduciaries may not take co-fiduciary liability seriously enough. How many times have we seen all of the members of a partnership, whether it be doctors, lawyers or architects, as signatories to a plan document as trustees? In contrast to all the names on the execution page of the document, who is actually making the decisions? Have all of those co-fiduciaries been adequately informed as to their exposure for the acts of their co-trustees?
- The wrong parties act to amend the plan. How many times do we see "trustees" amending a plan document or a plan administrator adopting a "policy" which really only can be legally accomplished by an amendment to a plan by the governing body of the employer?
So How Do You Fill Out Your Game Card?
The best lineup for your infield will come from the deliberate coordination of your plan provisions, the governing structure of the entity sponsoring the plan, and the skill and abilities of the individual players available to you. That is, starting from the top down organizationally, determine if the plan provisions allocate control and discretion over plan functions in a way that suits how the plan sponsor actually operates. If not, amend them! Regardless of whether it is a prototype document or not, the fiduciary provisions should be tailored to the needs of the sponsor (not the other way around). If the fiduciary provisions of the plan provide for the appointment of committees or individuals to serve in certain functions, thus shifting the operative provision to their shoulders (and this is acceptable to you), then take the step, pick the players, and do it in writing!
Next, the players, tasks and duties need to be accurately delineated. Are the differences between ministerial and fiduciary functions clearly laid out? Do they understand what they can and must do on a periodic basis? Do they have a structure for documenting those decisions and considerations?
Finally, has appropriate consideration been given to whether line or staff persons should fill those positions? Are the selected people appropriate for the task? You don't want your slugger batting lead-off or the guy with glass hands playing shortstop. Should more than one person be making the decisions? Should certain decisions and actions be put back to the "manager" on a regular basis? For example, decisions to amend the plan document or to amend a loan policy and procedure to reflect changes in the way the plan administrator wants to operate the plan may be subject to plan sponsor approval. Such would still be required if the amendment was to a "policy" document which is incorporated by reference and actually constitutes a term of the plan itself.
What To Do?
There are a number of effective lineups for your infield. You can have "lefties" or right-handers at first base or at third base. You can have HR personnel at shortstop and a player coach/chief executive officer on the mound, if needed. It all comes down to the type of plan and the resources and operations of the plan sponsor. There is no substitute, however, for taking the above principles into account when filling out your game card on game day.