Tuesday, July 24, 2012

The Duty to Monitor - Serious Business!

Way back in June of 2009 we wrote a post called 'Fiduciary Delegation - Myth or Reality', located here;


The post discusses the merits of (and how to do it) one fiduciary, such as the plan sponsor, delegating away fiduciary responsibility to another fiduciary, such as a discretionary trustee.  It also specifically points to the parts of the ERISA that relates to appointment and delegation.  In our minds when we wrote that we were thinking specifically of how a plan sponsor might shield itself from fiduciary responsibility surrounding selection and monitoring of investments and the risks associated.  Part and parcel to delegation is 'Prudent Selection and Monitoring'.  The idea was that in order to accomplish some risk mitigation, the plan sponsor would need to make sure the appointed fiduciary was prudently appointed and somehow monitored going forward.  What we didn't deal with in the post, but held true then and still holds true now was that ALL parties associated with the plan, fiduciary or not, must be prudently appointed and monitored.  This Duty to Monitor is part of basic fiduciary responsibility.

Flash forward to 2012.  Very recently, Plan Sponsor Magazine published an article specifically dealing with a plan sponsor, Clark Graphics, failing to properly monitor its' functional Administrator (ERISA 3(16)) or their hired service provider, the Third Party Administrator (TPA).  You can find the article here;


The U.S. Department of Labor (DOL) suit alleged insufficient oversight and mishandling of plan assets resulting in multiple violations of the Employee Retirement Income Security Act. Specifically, the suit alleged that the owners, failed in their fiduciary responsibilities as plan trustees by neglecting to monitor the actions of the plans’ administrator.  The results were that the owner's of the company are being asked to restore the funds to the two plans in question amounting to approx. $500k and that the administrator in question is required to restore the same sum offset by the amount paid by the owners.  One way or the other, the plan participants will be made whole from the administrative mistakes.  Both the owner and the service provider are no longer allowed to serve as fiduciaries or service providers to any other plans.

“Employers that sponsor retirement plans have a fiduciary duty to monitor plan assets and ensure they are handled appropriately and protected,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “Contracting with an outside firm to manage those assets does not absolve them of their legal responsibilities.”

We can't think of a better case to illustrate the importance of monitoring service providers.  That said, this case begs the question;

Are the business owner's or an appointed internal committee of business managers the appropriate people to serve as the plan trustee or as fiduciaries responsible for service provider oversight?  

This author would argue that the answer to that question, most of the time, is no, but that these are the individuals often in charge of doing just that.  In our experience, the expert level of care required is mainly not available within the staff of most employers.  The requisite skills, interest or ERISA education is, simply put, not present.  In our opinion, the party in the best position to provide prudent monitoring of service providers is the Retirement Plan Consultant or Plan Advisor.  If you are a Retirement Plan Professional reading this post, we think it would be a great idea to list this amongst your services offered.

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