ERISA

The Duty of Prudence: 5 Compliance Actions

09.06.2022

 

The Supreme Court’s decision in Hughes v. Northwestern University earlier this year did not add or change fiduciary standards. Nevertheless, the case shone the spotlight on the duty of prudence by plan sponsors in accordance with the already high standards of ERISA law. In the final quarter of 2022, experts recommend five related compliance actions for plan sponsors.

 

Wakeup Call

The administration of an employee retirement plan requires continuous attention to the investment options offered participants. According to legal experts, the Hughes v Northwestern Supreme Court case is a “wakeup call” for retirement plans of all sizes that have allowed poorly performing investment choices to remain in the plan, essentially leaving it up to plan participants to navigate the options. As Fisher Phillips sums up:

 

On January 24, the Supreme Court reaffirmed and highlighted the ongoing duty of ERISA plan fiduciaries to monitor investment options — and remove imprudent investment options — in satisfying their fiduciary duties. The Court found in Hughes v. Northwestern University that plan fiduciaries cannot rely on the participants’ ultimate choice over their investments to excuse allegedly imprudent investment options offered and retained by the plan. The unanimous ruling should serve as a wakeup call to those administrating employee retirement plans. Although the ruling does not significantly alter any existing interpretations of fiduciary liability standards, the decision still highlights best practices for plan sponsors in administering their retirement plans and defending current or potential investment option litigation.

 

Five Compliance Actions

While the Hughes decision did not change ERISA standards related to the satisfaction of the duty of prudence, experts remind us that the case “highlights the importance of monitoring investment options and making timely changes to the investment lineup when necessary. Satisfaction of the duty of prudence remains a procedural analysis, requiring thorough review, analysis, and documentation for fiduciary actions.” Specifically, plan fiduciaries are advised to take these five compliance actions:

 

  • Ensure plans include a reasonable number of diversified investment options;
  • Regularly, and carefully, monitor each investment alternative for return and costs;
  • Regularly, and carefully, monitor where the plan stands against peer plans of like sizes in terms of cost to participants;
  • Consider retaining independent experts to assist with, or take on, fiduciary duties relating to investments; and, of course,
  • Keep detailed, written, and contemporaneous records of committee meetings.

 

A common—and risky—mistake made by retirement plan sponsors is assuming that by hiring advisors and service providers, they no longer have fiduciary obligations. Jeff Coons at High Probability Advisors offers this advice: The mistake we see most often is a plan sponsor thinking their record keeper or broker advisor is responsible for picking the funds on their investment menu when the reality is the plan sponsor is the fiduciary responsible for that decision. To avoid this mistaken belief, plan sponsors should ask advisors and other providers to put their responsibilities and fiduciary status in writing and confirm that status regularly.” The IRS  also reminds plan sponsors that selecting and monitoring individuals or companies to manage an employer sponsored retirement are important examples of the fiduciary responsibilities associated with plan sponsorship. Depending on the arrangements, these contractees likely have fiduciary obligations of their own, but plan sponsors retain their own status as fiduciaries. That’s why Colonial Surety offers an affordable Fiduciary and Cyber Liability insurance Package that arms plan sponsors with:

 

  1. Legal defense and coverage for penalties against claims of alleged or actual breaches of fiduciary duties.
  2. Defense against lawsuits and regulatory actions related to a cyber breach.
  3. Expert-led response, notification and crisis management services to prevent a cyber incident from spiraling into a disaster.

 

The  annual cost of our Fiduciary with Cyber Pack is less than the fee for one hour of expert legal defense if a lawsuit or regulatory challenge strikes you and your business. Let’s get you covered, in minutes, today: Plan Sponsor Protection Package.

 

Doing The Right Thing

The swirl of ERISA litigation and setting of precedence, continues to keep everyone involved in the management of retirement plans busy. Recently, for example, we’ve been reminded that while reasonable fees matter, finding the lowest fees does not automatically mean we’ve done the right thing. One thing is clear: it’s best for everyone involved in the management of an ERISA plan to mitigate risk with Fiduciary and Cyber Liability Coverage.

 

It’s also critical to attend to basics. For example, the Department of Labor continues to mandate ERISA fidelity bonds to protect the assets of the retirement plan from theft and failure to have an up to date ERISA bond is a frequent oversight—one that is know to trigger plan audits and investigations. Make sure your ERISA Bond adequately covers your plan. You don’t have to figure it out on your own—Colonial Surety is here to help: uniquely, we even include retroactive ERISA fidelity bond coverage for years when the plan was not adequately covered. Additionally, we offer cost-saving multi-year coverage, ensuring the ERISA bond remains Department of Labor compliant for the life of its term.

 

Obtain or Renew Your ERISA Fidelity Bond Here Now.

 

Pension plan professional? We’ve got you too. From  Errors and Omissions Insurance to Fiduciary Liability Insurance, Employment Practices Liabiity Insurance–and more, we’re HERE with the coverages you need to keep your business going—and growing. Insurance for Pension Professionals Right Here.

 

Colonial Surety was founded in 1930 and continues giving customers the assurance that they, their businesses, and their clients are safeguarded with the right surety and insurance products at all times. We are a direct and digital insurer offering products through an online platform supported with exemplary customer service. We give customers a simple, direct, and instant service that takes the pain out of buying insurance and bonds. Colonial Surety is licensed in every state in the U.S., rated A” Excellent by A.M. Best, and listed by the U.S. Treasury as an approved surety.