Compliance August 6, 2018

Pace of EBSA Settlements and Plan Corrections Is Strong

“On the retirement side, again, there is a strong focus on missing participants, and EBSA is diving incredibly deep," says David Levine, principal with Groom Law Group.
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On its website, the Department of Labor (DOL) reports its enforcement of the Employee Retirement Income Security Act (ERISA), via the Employee Benefits Security Administration (EBSA), now extends to over nearly 681,000 retirement plans.

The EBSA’s mission to ensure the integrity of the private employee benefit plan system in the United States also applies to approximately 2.3 million health plans, and a similar number of other welfare benefit plans, such as those providing life or disability insurance. These plans cover about 143 million workers and their dependents and include assets of more than $8.7 trillion as of the end of 2015, EBSA reports. In 2017, EBSA recovered $1.1 billion in direct payment to plans, participants and beneficiaries.

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According to the most recently published EBSA enforcement data, in 2017, the regulator closed 1,707 civil investigations, with 1,114 of those cases (65.3%) resulting in monetary compensation for plans or other corrective action. EBSA says this “exhibits its ability to effectively target ERISA violators in the employee benefit plan universe.”

Of the $682.3 million recovered in its investigations, EBSA helped terminated, vested participants in defined benefit plans collect benefits of $326.7 million due to them. In the enforcement data, EBSA notes that it “often pursues voluntary compliance as a means to correct violations and restore losses to employee benefit plans. However, in cases where voluntary compliance efforts have failed, or that involve issues for which voluntary compliance is not appropriate, EBSA forwards a recommendation to the Solicitor of Labor to initiate litigation.”

Notably, the data shows in 2017, 134 cases were referred for litigation, but the DOL only filed suit in 50 civil cases. This is because EBSA works with the Solicitor of Labor “to determine which cases are appropriate for litigation, considering the ability to obtain meaningful relief through litigation, cost of litigation, viability of other enforcement options, and agency enforcement priorities.” Of course, EBSA civil cases referred to the Solicitor’s office for litigation are often resolved with monetary payments, short of litigation.

Demonstrating EBSA’s broad authority, the data shows EBSA closed 307 criminal investigations last year, leading to the indictment of 113 persons for misdemeanor or felony crimes related to employee benefit plans. EBSA has responsibility to investigate potential violations of the criminal provisions of ERISA and those provisions of Title 18 of the United States Code that relate to employee benefit plans.

EBSA’s Voluntary Fiduciary Correction Program (VFCP) and Delinquent Filer Voluntary Compliance Program (DFVCP) encourage the correction of violations of ERISA by providing significant incentives for fiduciaries and others to self-correct. In 2017, EBSA received 1,303 applications for the VFCP. The DFVCP encourages plan administrators to bring their plans into compliance with ERISA’s filing requirements. In 2017, some 22,139 annual reports (and $14.4 million) were received through this program.

Lessons from the data

These settlement numbers may seem quite large on first glance, but given the fact that there are more than 650,000 retirements plans alone under its jurisdiction, it is clear that EBSA faces an incredible regulatory task—one made all the more difficult by the complicated nature of even relatively straightforward benefit plans. Thus the regulator has to focus its investigative and enforcement resources in strategic and targeted way, explains David Levine, principal with Groom Law Group, in Washington, D.C.

As an example, he suggests one major regulatory priority in 2018 is “cracking down on the missing participants.” And it makes sense why EBSA would focus on this issue, given that it is more or less a universal issue across all types of plans, industries, regions, etc. Interestingly, this focus has been building for some time and continues under President Donald Trump, because while the top-level political leadership of DOL has changed, the rank and file remains, along with many of their ongoing projects.

“This is the center of the DOL world right now, as it relates to retirement plan sponsors, in my opinion,” Levine says. “Sure, there are other things going on, but enforcement is part of life and it does not change very much if it is a Democratic or Republican administration. You have got regional offices spread across the country, and they take guidance from the national office in Washington, but in reality they are relatively autonomous and move at their own pace.”

This is a big reason why, despite the Trump administration’s anti-regulatory agenda in so many other areas, when it comes to policing of retirement plans by the EBSA, the pace of settlements and corrections remains strong.

“I can tell you that the regional offices have been doing a lot of investigations, both on the retirement side and on the health care side as well,” Levine adds. “On the retirement side, again, there is a strong focus on missing participants, and EBSA is diving incredibly deep. They are auditing both defined contribution and defined benefit plans on this issue.”

Levine warned that many plan sponsors, when asked by the EBSA about their policies and procedures in this area, are taken aback, and they try to explain that they rely on the recordkeeper to search for missing participants.

“But as the EBSA will tell you, the responsibility ultimately sits with you as the plan fiduciary to find these people and implement your stated policies effectively,” Levine says. “There is Field Assistance Bulletin 2014-01 from the DOL that says, ‘Take these steps and you will be OK.’ But in the investigations they are going much further. I’ve had an EBSA regional office director recently tell us that a plan sponsor should have cold called a person that may have worked with a missing participant more than 20 years ago. Because these investigations get very timely and costly, I highly recommend going back and rechecking your fiduciary insurance. Make sure the policies are good and cover the costs of dealing with these investigations. You can end up spending a lot on lawyers.”

According to Jodi Epstein, a partner with Ivins, Phillips and Barker, other agencies and regulators with a strong degree of autonomy are also continuing enforcement pushes in a variety of areas under President Trump. She points to missing participant audit activity by the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) as two leading examples.

“Yes it’s the DOL leading enforcement of retirement plans, but all the agencies are in on this,” she explains. “They are all thinking about missing participants and many other issues. They’re all putting out guidance that says one simple search for missing participants is not enough.”

Another important ongoing enforcement factor Epstein points out is that, for the first time in some time, DOL and IRS are hiring more enforcement and guidance development personnel.

“This is something new and interesting that has really just picked up in the last few months,” she explains. “I think it is something to watch and actually potentially a good thing for plan sponsors, because we could see some of the guidance projects actually pick up speed. Perhaps we will see more helpful guidance in areas that are pressing for plan sponsors right now, on retirement income safe harbors, for example.”
Compliance July 31, 2018

Plan Sponsors Shouldn’t Fear Making Settlor Decisions

Retirement plan sponsors often fear participant backlash when making decisions that could actually help improve participant outcomes, but the law is on their side, as plan amendments are considered settlor functions.
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During the recession of 2008/2009, a number of employers suspended or reduced their employer matches to their retirement plans.

While this could potentially be seen as an action taken against the best interest of participants, employers need not fear Employee Retirement Income Security Act (ERISA) participant lawsuits regarding such decisions. Why? Because these decisions are settlor decisions.

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“A settlor function would typically be something that is a business decision as it relates to the employee benefits plan,” explains Rhonda Prussack, SVP and head of Fiduciary and Employment Practices Liability at Berkshire Hathaway Specialty Insurance in New York City. “Establishing a plan, terminating a plan and amending plan terms are typically considered settlor functions.”

This contrasts with fiduciary decisions, which require prudence and loyalty, Prussack adds. Examples would be investing plan assets, defraying plan expenses and operating the plan according to the plan document.

Tom Foster, national spokesperson for workplace solutions at MassMutual in Enfield, Connecticut, explains that fiduciaries to a plan exercise control over the management or deposition of assets, provide advice for a fee, and have discretionary authority and responsibility for administration of the plan.

A 402 fiduciary is the named fiduciary in the plan and has ultimate authority. Other fiduciaries could include a 3(16) plan administrator, which performs day-to-day operations; a 3(21) investment adviser, which shares fiduciary responsibility for recommending and monitoring investments; and a 3(38) fiduciary, which has complete responsibility over selecting and monitoring investments. However, Foster warns, retirement plan sponsors can delegate some responsibilities to others, but the ultimate responsibility is on the named fiduciary.

“It is critically important that fiduciaries first know who they are—not everyone is a named fiduciary,” Prussack says. “Sometimes a plan committee is the named fiduciary. However, if a fiduciary is not named in the plan document, then automatically the plan sponsor is the fiduciary—essentially it’s the company’s board of directors. If fiduciaries are not named in the plan document, a court will look at what their duties were, and whether they exercised discretion over the plan and its assets.”

Fiduciaries should act in the best interest of plan participants, make sure they are getting the best plan cost, operate under the prudent man rule, avoid prohibited transactions and self-dealing and monitor other fiduciaries, Foster adds. He also notes that settlor fees may only be paid by the plan sponsor, whereas administrative fees may be paid by the plan.

Wearing two hats

“I think there are a lot of examples where the two interact—where settlor decisions sometimes lead to higher liability or exposure to fiduciaries,” Prussack says. “Company executives typically wear two hats; they are entitled to make decisions in the best interest of company. ERISA allowed for latitude because companies are not required to offer retirement plans. Executives or committees can make a business decision whether to offer a plan, continue a plan, or change terms of a plan. However those decisions may negatively impact plan participants.”

Foster adds that often it is the same person or committee acting as a settlor looking out for the best interest of the employer and acting as a fiduciary looking out for best interest of the plan and participants. For example, many plans have eligibility requirements, and establishing those requirements is a settlor function, but plan fiduciaries have a responsibility to make sure the requirements are met. If an employee is eligible for automatic enrollment in June but not brought into the plan until August, that is a breach of fiduciary duty.

Foster adds that deciding on loan provisions and the definition of compensation in the plan are settlor functions, but a fiduciary must properly implement these provisions. Adding automatic deferral escalation and stretching the match are settlor functions because they are plan amendments, even if to some participants they seem to be not in their best interest. He notes that the plan sponsor has the ability to amend the plan as a settlor function, but regulatory changes that require plan amendment is a fiduciary function to make sure the plan complies with law.

According to Prussack, courts, including the Supreme Court, have made it clear that plan design issues are a settlor matter. “What’s really important is that most plan documents will afford wide latitude to amending the plan and terminating the plan for wide range of reasons. Typically, in plan documents there is broad language and under that, companies can do quite a bit, even if the changes make participants unhappy, and even if the changes impact lower-paid employees. It is important that the plan document is written as broadly as possible,” she says.

“Plan sponsors’ best bet is to consult with someone who is an expert—an ERISA attorney. It would be money well spent in making sure the plan document broadly allows the changes plan sponsors want to make. It is a lot less expensive than getting involved in lawsuit,” Prussack suggests.

Mitigating liability

Prussack says litigation regarding settlor decisions actually comes up quite a lot, especially where there is a change or cutback in defined benefit (DB) plans, or retiree medical coverage. A plan sponsor’s first line of defense is to say that the folks who made the decision to terminate a pension plan, to annuitize pension benefits or the decision to end retiree medical benefits were wearing a settlor hat, and these are business decisions allowed under ERISA. The common allegation of plaintiffs is that the people making these decisions were in some way acting as fiduciaries because the changes had a negative impact on plan participants.

However, Prussack says, “These lawsuits are not generally successful because the law generally gives wide latitude to plan sponsors to make changes to voluntary benefits.”

Still, it wouldn’t hurt plan sponsors to get insurance coverage for these types of cases, Prussack suggests. “Companies that purchase fiduciary liability insurance want to ensure that costs to defend settlor cases are covered and that they have the broadest wording for settlor capacity claims.”

She explains that settlor coverage only came about around six years ago, but today there are insurance carriers that offer broad wording that says plan sponsors have coverage in their settlor capacity. Other policies say plan sponsors have coverage as a settlor when they do specific activities, such as establishing, amending or terminating plan, but if the settlor decision falls out of these categories, it won’t be covered. “So plan sponsors want really broad wording in their insurance policy,” Prussack says.

Foster says another way to mitigate liability in making settlor decisions is to have two committees, one for settlor functions and another for fiduciary functions.

“Our suggestion would be to work with professionals to help understand when there is a potential for liability,” he says. Foster notes that plan advisers cannot render legal advice, so plan sponsors should seek help from attorneys or certified public accountants (CPAs).

“Obviously changes aren’t made in a vacuum. Plan sponsors have to look at their employee population and making employees ready for retirement. It takes a lot of mental gymnastics to think about what is best for the plan sponsor and what is best for retirement plan participants,” Foster concludes.

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