Just as the world must adjust to the COVID-19 pandemic, ERISA retirement plan fiduciaries must calibrate their processes to fit the pandemic environment.
Identifying steps to take and decisions to consider to adjust their process is the subject of a new “LawFlash” from Morgan Lewis law firm Partner Julie K. Stapel and Associate Elizabeth S. Goldberg.
This is especially important now because fiduciary decisions made during this difficult time may be especially ripe for second-guessing by plan participants or by regulators, the authors say. In the face of such second-guessing, fiduciaries will be better positioned in litigation or a regulatory investigation if they can point to a record of having considered and, as appropriate, adjusted their process to address the COVID-19 societal and economic realities.
Just as having a prudent process is key to satisfying ERISA’s fiduciary standard, a ready record of that process is key to proving compliance with that standard, especially in later ligation and government inquiries, the brief says.
Here is a brief summary of their six recommendations. For the full explanation, see the complete LawFlash on the Morgan Lewis website.
- Discuss preparedness with investment managers and investment consultant
This is a good time for ERISA plan fiduciaries to reach out to the plan’s service providers to verify the provider’s ability to handle—and adjust to—economic and societal disruption.
For example, plan fiduciaries could ask investment providers about their business continuity plans, such as the provider’s capacity to continue to manage assets during times of disruption. This can include questions about operational disruption, such as how the provider can operate during quarantine periods.
Other appropriate questions could be about:
- Whether the organization has a backup plan should a key person become unavailable
- Investment managers’ ability to continue purchases, redemptions and valuations during future disruptions
- Whether there will be delays in reporting, including tax reporting, related to the plan’s investments
The goal is to confirm (and document the confirmation) that the provider appears able to continue to operate—or adjust—to future economic and societal disruptions, so that the plan is able to continue investment-related operations. If the inquiry raises any concerns, fiduciaries should consider the appropriate responses (and, again, document those responses).
- Review plan investments to confirm readiness for volatile market—and then closely watch those investments
After inquiring about provider operations, plan fiduciaries could next conduct a review of the plan’s investments. During this time of uncertainty, it may be appropriate for ERISA fiduciaries to review the plan’s investments and fund lineup to consider whether they remain prudent investments in the current market environment.
For example, a key question could be whether the prospect of future market volatility warrants adjustments to the plan’s investment guidelines and/or underlying investments.
The market volatility may have also resulted in the need to rebalance among asset classes to maintain the plan’s desired asset allocation. The need to rebalance may also prompt fiduciaries to consider whether plan investment guidelines and investment policy statements remain appropriate.
- Consider whether the plan offers adequate capital preservation options
In defined contribution plans, many participants are investing with the long view. But there can be a pool of participants—especially those nearing retirement—whose investment needs are focused on preserving investment value.
Market disruptions can have an outsized effect on those participants. Fiduciaries may wish to engage with their consultants and other advisers to evaluate whether the investment options on the more conservative end of the lineup offer sufficient income preservation opportunities.
- Increase participant education, especially for DC plans
Another action point for plan fiduciaries could be increasing participant education efforts, particularly for participant-directed defined contribution plans.
If the markets continue to experience volatility, both the plan participants and the plan fiduciaries will benefit from an increased focus on educating participants to empower them to make decisions that best suit their investment and retirement goals.
It is helpful if participants that could best benefit from those options (such as individuals nearing retirement) are aware of those options and understand the value—and risks—of using them. For example, participants may benefit from education on the benefits of using target date funds, but also may need to be educated about the fact that such funds still carry risks, including general exposure to equity markets, even at the tail-end of their glidepath.
One step plan fiduciaries could take is to kick off—or increase the frequency of—participant education outreach, such as presentations and education literature. In the remote work environment, care could be taken to make these sessions accessible to participants, such as by setting up virtual or telephone sessions, or electronic communications.
- Review and adjust the committee process
This is not a time to stop fiduciary process. Instead, committees may need to simply adjust their processes to ensure they can continue to function and engage in an appropriate level of oversight of the plan in a virtual and “work from home” environment.
Committees should consider moving to virtual or telephonic meetings at least as frequently as the committee’s otherwise established or typical schedule would provide.
These types of process changes may require amendments to the committee’s governing documents (i.e., charter or bylaws), and so now might be a good time to review such documents and to make any updates to fit the COVID-19 world.
- Evaluate the plan’s fraud protection mechanisms
Another potential action point for plan fiduciaries is to consider a review of the adequacy of the plan’s fraud protection mechanisms. The COVID-19 crisis may trigger increased fraud activities, because of the economic disruptions and increase in electronic communications caused by the crisis.
A theft incident can be expensive, harmful to the plan and the plan sponsor, and damaging to relations with current and former employees.
The ERISA fiduciary duties of loyalty and prudence could be deemed to impose an obligation to take reasonable steps to shield participants from losses stemming from benefit plan fraud. In light of these risks, now may be a good time for plan fiduciaries to review and understand the structures that are in place to protect participant information and participant assets. This could involve inquiring with the plan’s service providers (such as the plan’s recordkeeper) and/or conducting a formal audit to evaluate how participant information is protected and what mechanisms exist to protect participants from identity theft and fraudulent benefit payouts.
The goal of this inquiry could be to confirm (and document the confirmation) that the plan has reasonable and appropriate protections in place to guard against fraud.
- SEE ALSO: Which 401k Plans Get Sued and Why?