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HR Magazine: Fidicuiary Fitness

Carolyn Hirschman  9/1/2003
 

HR Magazine, September 2003Vol. 48, No. 9

Managing your company's benefit plans is one of the weightiest responsibilities you can tkae on as an HR professional.

Benefits experts continually debate the best ways to educate employees-how to make them smart health care consumers and 401(k) plan investors, for example. Now some in-house managers of health and retirement plans are asking themselves how much they need to educate themselves-to do their jobs right and to stay out of legal trouble.

The HR professionals who run benefit plans for their employers don't always know all there is to know about those plans. In fact, experts note, some officials at smaller firms aren't even aware that they are fiduciaries-the legal term for the people who control benefit plans.

The truth is that fiduciaries need education, too, not only to help employees get their money's worth but also to avoid mismanaging plans and being held personally liable for doing so. Fiduciaries are held to strict standards of performance under the same federal law that protects employees from abuse, fraud and negligence in the operation of their retirement and health plans.

That law, the Employee Retirement Income Security Act of 1974 (ERISA), governs about 7 million private health, retirement and other benefit plans. Exempt are government, church, workers' compensation and unemployment plans, although all plans are subject to related tax laws and regulations.

"ERISA is really complicated," says David L. Wray, president of the Profit Sharing/401(k) Council of America in Chicago. "There are few people who have the time to understand how it works."

Interest in fiduciary education is running strong because fiduciaries increasingly want to be sure they're complying with ERISA's complex requirements, particularly in the tense environment created by the dozens of lawsuits against companies-Enron Corp., WorldCom Inc. and R.J. Reynolds Tobacco Co., to name a few-alleging breaches of fiduciary responsibility.

Cases with Enron-type allegations of fiduciary malfeasance are rare, however. Most breaches of fiduciary duty, experts say, involve ignorance, poor judgment or negligence-failing to deposit employee contributions in a timely manner, for example-rather than outright fraud. Missteps often involve investment management, arguably the most complex of fiduciaries' tasks. Fiduciaries may fail to balance a portfolio with enough asset classes, for example, or neglect to remove underperforming funds or to monitor investment managers closely enough.

Practices that Protect

As many human resource managers know, ERISA compliance is a complex, time-consuming process that requires close, continuous attention, the expertise of a team of specialists and, above all, prudent behavior.

Although the meaning of prudence varies with the situation, experts generally maintain that a fiduciary who creates, follows and documents processes and procedures to make informed decisions is doing the right thing.

"You have to go with good decisions. Document why you made decisions," advises Shari Davidson, vice president of benefits at Quebecor World Inc., a global commercial printing company based in Greenwich, Conn. In the United States, Quebecor employs 25,000 people at 90 locations. Davidson is a member of Quebecor's North American pension committee-itself a company fiduciary, consisting of legal, financial and investor relations executives. The committee meets quarterly to review plan designs, look at investment results, make necessary changes in investment options and perform other duties.

Like Quebecor, large companies typically have internal committees composed of HR and other executives to oversee benefits plan selection and management, and they often hire consultants to help. Small businesses generally rely on their accountants or attorneys to find providers of so-called bundled services.

However, fiduciary responsibility doesn't automatically pass to the outside service providers contracted to handle specific functions of a company's benefit plan -- the third-party administrators, investment managers, consultants, record keepers and so on. Fiduciaries who hire outside consultants to help with such tasks must monitor their performance, too.

"It's more time-consuming to do it right than people think," says Antoinette Pilzner, an attorney at Butzel Long PC in Detroit and a member of the Society for Human Resource Management's Compensation & Benefits Committee.

How to Proceed

If you have fiduciary responsibilities, lawyers and consultants say, you should follow a consistent procedure in selecting benefit plan providers and keep records that detail how and why decisions were made.

Document everything, experts advise. Write it all down or record it via computer so you can prove that you followed all procedures in accordance with ERISA. Keep reports, letters, minutes, scoring sheets and other records. Such documentation may be arduous and boring, but it can be a fiduciary's best defense if participants file a lawsuit. "The fiduciary standard is met at the time you made the decision"-not six months later, when the vendor does something wrong, Pilzner says.

Apart from record keeping, methods of selecting a plan provider are much like those for selecting other contractors. "Get someone whose core clients are the same size and have the same issues as you," advises C. Frederick Reish, managing director of the Los Angeles law firm Reish, Luftman, McDaniel & Reicher.

To start, outline the kind of plan you're looking for, and set objective criteria for it. Gather at least three proposals. Closely examine each bidder's qualifications and services, obtain three references, check for proper licensing and any lawsuits filed against the provider, and check the bidder's financial stability.

If you're choosing a health plan, check on the insurer's solvency, licensing, ratings, internal data systems, timeliness of claims payments and customer service. One tricky issue is fees. Getting an apples-to-apples comparison can be difficult because there's no standard format in proposals. To get the best deal for participants, fiduciaries should determine how much vendors charge for comparable services and whether fees are charged to plan assets or to the plan sponsor. There's no obligation to pick the lowest bidder, however.

"There's no right fee," Wray says, "but you need to justify the fees as appropriate." Plan sponsors often overpay, Reish says, because "there are a lot of partially hidden expenses."

Review expenses every year or two to make sure they're reasonable. Orlando Regional Healthcare, a six-hospital system in central Florida, checks its retirement plan administrator's fees from time to time to make sure "our participants aren't paying more than they should," says Nancy Dinon, vice president of HR.

Orlando Regional, with more than 10,000 employees, hired a consultant to ensure adequate compliance and objectivity in choosing a retirement plan vendor. "It was a good learning process," Dinon says. "I hadn't done it before, and neither had members of my team." Dinon is one of six top officers on the nonprofit organization's benefits trustee committee.

Fiduciaries must monitor vendors' performance at least annually. Meet with investment managers to review their investment decisions, experts say, evaluate each investment's performance against benchmarks and plan goals, and assess customer service. Also check retirement accounts for churning-unnecessary buying and selling to generate commissions.

Fiduciaries who don't consider themselves experts in the benefits they manage may wonder how they can evaluate the expertise of plan providers. Rule No. 1 is to ask for explanations when needed. Rule No. 2 is to learn enough to do the job or hire a knowledgeable consultant.

Says Quebecor's Davidson: "We may not be stock pickers ourselves, but we can analyze investment returns. We can't do it alone. We have [internal] finance experts and an outside consultant."

One helpful tool is a fiduciary audit, in which a lawyer or consultant examines fiduciary activities with a fine-tooth comb to safeguard against breaches and potential lawsuits. "It prevents sanctions and demonstrates prudence," says Jeffrey Mamorsky, chairman of the employee benefits group in the New York office of the Greenberg Traurig law firm.

The cost of a one- or two-day audit depends on a plan's size and complexity. Vendors serving small plans often build such audits into their service packages.

Finally, if errors or problems arise, it's the fiduciary's job to act-to replace a vendor if necessary. Reish says, "Put what's right for the employees' benefits first."

The Penalty Phase

Fiduciaries who are accused of breaching their duties can be hit with federal civil suits filed by the U.S. Department of Labor (DOL) or by benefit plan participants and beneficiaries. Criminal cases, such as theft from a plan, are rare.

The federal agency that can come down on fiduciaries is the DOL's Employee Benefits Security Administration (EBSA), formerly the Pension and Welfare Benefits Administration. In an action typical of the type of complaint that EBSA takes to court, the agency sued Current Development Corp. of Elmhurst, Ill., and its president, George P. Klein Jr., in March 2002, alleging failure to restore $38,388 to participants in the company's profit sharing and money purchase plans.

According to the suit, assets of the plans were used to pay the company's legal fees in another EBSA lawsuit against the company-which it lost-for failure to file annual reports as required by ERISA. The plans had 58 participants and $2.5 million in assets.

Last year EBSA closed nearly 5,000 civil cases and collected $832.4 million through enforcement actions. It closed 154 criminal cases, resulting in 134 indictments and recovery of $4.6 million.

Given its limited resources, EBSA prefers compliance to litigation. The Voluntary Fiduciary Correction Program allows fiduciaries who correct certain violations to avoid or reduce penalties. The Pension Payback Program voids penalties for employers that restore delinquent contributions and lost earnings to plans.

Judges can remove and replace fiduciaries. The government can hold fiduciaries personally liable for restoring losses or profits to their plans and for paying "excise taxes" of up to 20 percent of any amount recovered. In theory, the government could take fiduciaries' houses and cars.

In practice, most fiduciaries are protected by fiduciary liability insurance or written indemnification agreements with their employers. But Pilzner notes that "if someone acts in total disregard and with willful or gross negligence, insurance will not protect them."

Although the U.S. House of Representatives earlier this year approved pension legislation that would, among other things, ease the liability risks for fiduciaries who contract with third parties to provide retirement investment advice for employees, the measure's prospects in the Senate are uncertain at best.

In the end, liability boils down to process. For example, a federal appeals court in 1999 found that fiduciaries of Unisys Corp.'s savings plan were not liable for the results of their purchase of guaranteed-income contracts from Executive Life Insurance Co. Although the contracts became worthless after Executive Life went bankrupt, the court ruled that the fiduciaries had acted prudently by putting two experienced employees in charge of the purchase, hiring a consultant to evaluate bids and examining insurance company ratings, among other actions. "Fiduciaries are typically not held liable for bad outcomes," says Serena G. Simons of Miller & Chevalier, a Washington, D.C., law firm. "You shouldn't lose if you can show you went through the proper motions to make good decisions."

The Learning Curve
The ERISA Advisory Council's Working Group on Fiduciary Education and Training, which advises the DOL, has recommended that EBSA expand its written and Internet-based guidance for fiduciaries, especially those working in small companies. No specific initiatives have been announced since the group issued its report last November. Ann Combs, the assistant secretary of labor who directs EBSA, says the agency is "exploring the concept of trustee/fiduciary training program for union and management as part of its ongoing compliance assistance initiatives."

For now, it's up to HR managers and fiduciaries to make certain they acquire the education they need to meet their responsibilities. Attendance at fiduciary training sessions has increased, experts say, though much education remains targeted to professional advisers rather than HR executives. A number of Internet sites, classes and other sources of information are available.

Orlando Regional's Dinon and her benefits director attended the Center for Fiduciary Studies near Orlando. Davidson of Quebecor also attends professional training programs, reads up on fiduciary duties and draws on her experience as a consultant.

"If you're going to assume responsibility, you have to get the education," Dinon says. "None of us ever assumes we know it all."

Carolyn Hirschman is a business writer based in Rockville, Md. She has written for a variety of business publications and has covered workplace issues since 1991.

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