The Enron scandal, you could say, changed everything. It’s not that workers hadn’t had legal recourse before, if their employers mishandled their retirement funds. But Enron drew national attention to the issue.
Under the federal Employee Retirement Income Security Act (ERISA), the fiduciary of a pension or 401(k) plan – that is, the official administrator – is obligated not just to manage the plan honestly, but also to manage it reasonably well and provide accurate and complete information to participants.
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In the aftermath of the Enron fiasco, employers have increasingly become aware of the implications of those fiduciary duties. They might be sued for failing to give enough choices to retirement plan participants, for example, or for forcing them to invest in company stock. They could be sued for not giving workers enough information, or for giving them erroneous information, or for not giving them enough opportunities to change their investment choices.
And fiduciary liability isn’t just an issue for large companies, or for those with old-fashioned pension plans, more employers realized.
“It’s an exposure, potentially, for any employer who has an employee benefits plan, whether they have five employees or 5,000,” said William K. Austin, a principal at Austin & Stanovich Risk Managers in Providence.
Austin noted that the insurance policies of most directors and officers specifically exclude liabilities under ERISA – and so do most employee benefit liability policies, which cover such things as a human-resources manager forgetting to enroll someone in the company health plan.
Richard D. Hoffman, managing partner of Nixon Peabody’s office in San Francisco and a lawyer for companies and their insurers in many fiduciary liability cases, said he has seen a growing number of employers buy insurance to protect themselves from ERISA claims.
But the number of claims has increased as well, Hoffman said, and the plaintiffs have become more sophisticated.
With 401(k) plans, such has been the concern over potential liability that Congress decided employees were actually being harmed by the excessive precautions.
Worried about being sued for forcing workers into overly risky investments, some plan sponsors had been investing 401(k) contributions in money-market accounts by default if the beneficiaries didn’t choose something else.
As part of the Pension Protection Act of 2006, which in general strengthened the protections for plan beneficiaries, Congress directed the U.S. Department of Labor to issue regulations that would provide fiduciary relief to plan sponsors that offered default investments other than money-market accounts.
The regulations, which were issued in draft form in September, protect plan fiduciaries that choose higher-return “qualified default investment alternatives” – and actually don’t protect those that stick with money-market accounts, noted David C. Morganelli, a lawyer at Partridge, Snow & Hahn in Providence.
Qualified alternatives can include life-cycle funds, balanced funds, or professionally managed funds, and must be diversified to minimize the risk of “large” losses. The regulations also require, among other things, that beneficiaries be given a chance to choose their investment options, and that they get at least 30 days’ notice before the first investment.
But the rules around default investments aren’t the only ones affected by the Pension Protection Act. Still in the works, Morganelli said, are new regulations regarding the investment advice that beneficiaries can receive from outside vendors hired to run the plans.
The regulations will clarify how vendors such as Fidelity Investments need to frame the advice they offer to workers, Morganelli said – and what information they must disclose, such as whether they will earn higher management fees if workers choose one fund over another.
This is important because, “as a defense mechanism, and I think a good one,” against fiduciary liability claims, many employers are bringing in investment advisers to talk to their workers, Austin said.
If the adviser has an undisclosed conflict of interest, however, that could create a whole other problem, Morganelli noted.
With the Pension Protection Act still fresh in employers’ minds, Morganelli added, lawyers such as himself have been answering an increasing number of questions about obligations and liabilities under that law and under ERISA. “It’s definitely picking up momentum,” he said.
Another issue likely to keep lawyers and risk managers busy for some time is ERISA liability regarding health savings accounts (HSA) – or rather, how to avoid it.
Normally, the health plans sponsored by self-insured employers are exempt from ERISA, but the fact that HSAs can be also used as supplemental retirement savings accounts immediately raised questions about just how the law would treat them.
It’s still a risk to watch out for, Morganelli said.
But, he said, the federal Employee Benefits Security Administration did issue guidelines in 2004 for employers who want to avoid ERISA obligations, even if they make contributions to the HSAs.
Those guidelines require the HSA plan to be “completely voluntary.” The employer’s involvement must be limited to payroll functions and publicizing the program, without endorsing it; and the employer must not be compensated for running the plan – except, at most, to cover the cost of the required payroll functions.
HSAs are still too new, especially in Rhode Island, for anyone to know for sure how their legal issues might play themselves out over time, Morganelli said. But the good news is, because the guidance is clear, employers can build their plans accordingly.
“Generally, if people get service providers involved – such as law firms and accountants and consultants that have the expertise – you spot the issues up front, and it’s easier to structure a plan to avoid running afoul of the rules,” Morganelli said.
