Retirement Plan Governance: Best Defense Against ERISA Lawsuits

Last year, the 10 largest Employee Retirement Income Security Act (ERISA) settlements topped $927 million. This is almost twice the amount of the largest wage-and-hour claims and many times more costly than any other type of claim arising under employment law. It is also a large increase from the prior year. Further, U.S. courts certified 77 percent of ERISA suits as class action claims.

The employer’s role in sponsoring a retirement plan is much more involved than administering the plan and wiring funds to a provider. ERISA holds the sponsor to exacting standards and unique responsibilities, but does not offer specific guidance with respect to those processes. Nevertheless, when these standards are violated – either accidentally or intentionally – the plan fiduciaries can be held personally liable.

The best prevention is good plan governance. Follow these six best practices, which will be developed further in future publications:

Guard Your Signature. Do not sign any service agreement, plan document, provider contract, or adoption agreement unless you have reviewed and understand it. Do not be afraid to ask questions or request changes. If you have ERISA counsel, seek their review.

Form a plan committee. A key executive, finance person, and human resources representative should be appointed to this committee, at minimum. Even large employers should keep the committee manageable – no more than 10 members is preferred.

Create an Investment Policy Statement. It does not have to be long or complex. Use it to document the following items: the essential elements of why you have the plan, who is responsible for certain duties, what sort of investment performance benchmarks you plan to follow, and which criteria you will use to select and evaluate investment managers and document the investment decision-making process you will follow. Amend when needed.

Maintain Plan Documents. You have, among other items, a plan document (often called an Adoption Agreement with a basic formatted document), Summary Plan Description (SPD), Board Resolution(s), Investment Policy Statement(s), and Committee Records (such as agendas, meeting minutes, handouts, investment performance benchmark summaries, and handouts from counsel, investment advisors, or proposals). If your plan has over 100 participants, you also have Form 5500, Summary Annual Reports (SARs), and annual audit reports.

Develop a Committee Charter. Describe the Committee structure, roles (Chair and Secretary), length of terms, and member selection. Describe the meeting procedure, including how often meetings take place, responsibility for minutes, the definition of a quorum, and summarize the decision-making process. Will there be subcommittees (such as for investment and administrative purposes), especially for larger plans? How will service providers be monitored and evaluated?

Committee Education. Do not overlook this critical step. It is not unusual for Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) to be unfamiliar with prohibited transactions, parties-in-interest, and the strict fiduciary standards imposed by ERISA. Newly-formed committees as well as new members to committees should be initially briefed on ERISA legal standards and responsibilities. Updates and briefings are advised every few years thereafter.

Employers Council offers ERISA and Benefit Consulting Services with member-only discounted rates. For information, email Peg Hoyt-Hoch at