ERISA litigation playbook part 1: DC plan governance best practices

Recent Employee Retirement Income Security Act (ERISA) lawsuits have shed light on six key areas affecting plan sponsors: governance, investments, plan fees, plan documentation, plan administration, and plan communications. This article kicks off our six-part ERISA Litigation Playbook series where we expand upon fiduciary best practices focused on governance.

Employers offering Defined Contribution (DC) plans to their employees have a fiduciary duty to properly oversee the plan and select and monitor plan service providers – for the exclusive benefit of the plan participants. For more than 30 years, the courts have emphasized that to satisfy fiduciary duties under ERISA, “a pure heart and an empty head are not good enough.”¹ Rather, good governance and proper fiduciary appointment and delegation are critical to help mitigate fiduciary risk. 

Fiduciary responsibility for a DC plan is initially “held” at the very top level of an organization (i.e., the Board of Directors), and is typically delegated down to a plan committee for ongoing plan operation and oversight. Here are a few key tips to consider:

Committee best practices

• A governance charter document serves to formalize the fiduciary delegation from the Board down to the committee and details specific fiduciary duties and responsibilities to the committee. While charters are not required, if they are in place, then they must be followed. Why? It can be a fiduciary breach when a written process is not followed.
• The committee is typically made up of an odd number of members (usually five or seven) from a cross-section of human resources and finance departments – recognizing there’s a fiduciary requirement to hire expertise in areas the committee is lacking (i.e., investment advisor, plan consultants).
• Think twice before having certain c-suite executives and in-house legal counsel serve as a voting member of the committee. Why? Executives may have conflicts of interest by holding confidential business knowledge that could impact the plan, and counsel is usually more beneficial to help defend a lawsuit rather than being named as a committee member defendant in a possible DC plan lawsuit.
• Fiduciary training should be conducted annually and a copy of the materials and committee members attending should be kept in the fiduciary file – this is really a “must have” basic step for any complete fiduciary file. If sued, courts will request copies of the training materials and attendees.
• Committee meetings are typically held quarterly, and the meeting minutes become an integral part of the fiduciary documentation (minutes will be requested in the discovery phase of a DC plan lawsuit). It may be helpful to have counsel review committee meeting minutes to train the committee what should and should not be included. Carefully crafted meeting minutes should capture enough detail on the evaluation and monitoring of the DC plan, but not too much detail of “who said what” and specific plan data points that could be detrimental to the fiduciaries if presented in a court.

Frequent RFPs show proper oversight

The committee has a fiduciary responsibility to conduct request for proposals (RFPs) for each DC plan service provider (recordkeeping, managed accounts, self-directed brokerage, auto-IRA cash outs, etc.) and an additional duty to monitor each service provider on an ongoing basis (annual monitoring and documentation is ideal).

Regardless of whether the plan needs it or not, a best practice is to periodically alternate between benchmarking and full vendor Searches:

• Every two to three years: Benchmark service providers fees and service(s); document any “indirect compensation” from rollover IRAs, managed accounts, brokerage accounts, float income and revenue sharing.
• Every five to six years: Conduct a vendor search of all service providers (recordkeeper, trustee, managed accounts, brokerage, auto-IRA, investment consultant).

Committees may wish to consider engaging outside counsel on sensitive plan projects (i.e., fee benchmarking) or committee meeting minutes to establish the work under attorney/client privilege.

Committee members can be held personally liable

Since each member of a DC plan committee can be sued for breach of ERISA fiduciary duties, both civilly and criminally, it’s imperative plan sponsors understand the plan’s insurance coverage levels for fiduciary policy, fidelity bond, cyber and professional liability coverage for the plan and plan fiduciaries. Often there can be dangerous policy carve-outs and exclusions, so understanding what is and is not covered – and sharing with committee members – will help educate the members on the sensitivity of their fiduciary role, but also help the committee see where additional coverage may be beneficial.

Here’s a checklist for plan governance best practices:

1. Create a governance charter document that outlines the fiduciary delegation, formal acceptance, and monitoring process.
2. Carefully use “Plan Sponsor” and “Plan Administrator” in documents.
3. Carefully select committee members for expertise and conflicts (CEO/CFO/Legal).
4. Conduct annual fiduciary training and document the attendees and materials covered.
5. Carefully craft fiduciary committee minutes to capture enough detail on process, but not too much detail where it could be questioned in court.
6. Review insurance for cyber/plan coverage (fidelity bond, fiduciary policy, cyber, errors & omissions).
7. Hire expertise where needed (3(21) vs. 3(38) investment consultant, independent fiduciary, consultant).
8. Conduct vendor search of all service providers every five to six years (recordkeeper, trustee, managed accounts, brokerage, auto-IRA, investment consultant).
9. Benchmark service providers fees and service every one to two years; document any “Indirect Compensation” from rollover IRAs, managed accounts, brokerage accounts, float income, and revenue sharing.
10. Consider use of Attorney-Client Privilege if timing on vendor search and/or fee benchmarking are stale.
11. Add fiduciary detail to annual audit report (last date of fee benchmarking, share class review, use of revenue sharing, etc.).

A full ERISA Fiduciary Considerations Checklist is available to help plan sponsors and their consultants ensure both the plan and committee members are properly protected. Download the complete checklist.