To Escape ERISA Claims In The US- Please Conduct An Audit

June 16, 2015

In managing ERISA claims dont forget your fiduciary duty!

NOTE:    One of the most important audits a risk manager/in-house counsel should conduct as part of a risk managment program is an audit of employee benefit plans. Many countries offer employee benefit plans, pensions, or related schemes in accordance with local laws.  In the U.S., employee benefit plans or retirement benefit plans are subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA).

For subsidiaries of foreign owned companies doing business in the U.S. or even for US based companies, it is very important, for reasons set forth below that a risk management program cover an ERISA audit as well as a compliance review. Failure to do so, could subject a company in the U.S. as well as the company’s board of directors  ( BOD) to $$$ in fines and penalties, not only from the Department of Labor’s standpoint but from the I.R.S. standpoint as well.   Therefore, either the in-house counsel or the risk management department must conduct the audit.  As most companies have HR coordinating employee benefit plans, I would not have HR conduct the audit.  The audit should be conducted impartially.

1.1  Employee Benefit Plans Review

Regulations adopted pursuant to ERISA set fort requirements respecting employee retirement and welfare benefit plans (the “Plan”), include:

  • Reporting and disclosure requirements
  • Fiduciary responsibility
  • Administration and enforcement
  • Participation and vesting

ERISA requires that health and welfare plans be set forth in a written document which describes the benefit and the operation of the Plan. The document must identify who is responsible for the control, management and operation of the Plan. The Plan must also have recordkeeping systems to track the flow of funds and written. Materials to provide to Plan participants.

The general review of a compliance audit should focus on three areas:

  • Fiduciary responsibility
  • Plan documents
  • Process, procedure, reporting and disclosure requirements

1.2  Fiduciary Considerations

ERISA sets standards of conduct for employee benefit plan sponsors and others who exercise discretion in managing a plan or plan assets. Therefore, use of discretion in administering and managing an employee benefit plan or controlling the plan’s assets makes that person a fiduciary to the extent of such control or discretion. Fiduciary status is determined based upon the functions performed.    Each Plan must have a named fiduciary; however, a person does not need to be named to be a fiduciary; who jointly or severally control and manage the operation and administration of the Plan. The Plan instrument may actually designate the named fiduciary or may specify a procedure for naming the fiduciary by the employer.

ERISA sets forth the standards and rules of conduct for plan fiduciaries. Plan fiduciaries are required under ERISA to fulfill a number of duties including:

  • A fiduciary must act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.
  • A fiduciary must carry out their duties prudently
  • A fiduciary must follow plan documents
  • A fiduciary must diversify investments
  • A fiduciary must pay only reasonable plan expenses

A fiduciary who breaches any responsibility or duty under ERISA may be personally liable to make good any losses to the Plan resulting from the breach. All fiduciaries have potential liability for the actions of their co-fiduciaries. Breaches of fiduciary responsibility can give rise to civil and criminal penalties, which can be enormous. This has been opened by the U.S Supreme Court. The U.S. Supreme Court has held that individual employee may bring an action for “appropriate equitable relief” under ERISA against an employer for breaching its fiduciary duties.  And recently, the US Supreme Court ruled that plan administrators must continue to monitor trust investments and remove imprudent ones.  This is a continuing duty which is seperate from the duty to exercise prudence in selecting investments from the beginning.  In order to properly follow principles as plan administrators the US Supreme Court  therefore ruled that plan administrators must act with "skill, prudence, and diligence"  and if not- they have breached their fiduciary duty!

Remember, it is cucial that subsidiaries of foreign owned companies doing business in the US that have employee benefit plans inlcuding 401 K plans follow ERISA regulations thoroughly and that their respective BODs fullfill their fiduciary duites properly.  It is also important to recognize where the company’s board is acting in a fiduciary capacity or on behalf of the employer in a non-fiduciary capacity.  If the BOD fails to act prudently in a fiduciary capacity it  and/or the company is exposed to claims worth $$$$ millions of dollars.  Just ask Lockheed Martin, Boeing, or Edison International.

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