The backbone of a fiduciary’s duties is the written plan document: understanding the key terms and adhering to them provides a bulwark against fiduciary breach. ERISA Sections 402(a)(1) and 404(a)(1)(d) require that every employee benefit plan be established and maintained pursuant to a written instrument and that the plan be administered according to its written terms (note fiduciaries must follow a written plan document only to the extent it is consistent with ERISA.) Veering from the plan’s terms is generally a per se violation of ERISA. The key to avoiding a costly breach of fiduciary duty is to stick to the plan.
While establishing the plan itself is a nonfiduciary settlor activity (which is not subject to the ERISA standard of care and therefore cannot be challenged for a breach of fiduciary duty), following the written plan in the day-to-day management and administration of the plan is a fiduciary duty. Failure to follow the written terms of the plan creates an obvious breach of fiduciary duty and is easy for a court or regulatory agency to spot and enforce.
Fiduciaries should establish a self-audit process through which they can regularly examine up-to-date versions of the written plan document and current plan practices to ensure that the plan continues to be administered in accordance with its terms. Without these regular self-audits, uncertainty about or unfamiliarity with the plan’s terms or its practices may result in ongoing fiduciary breaches that could last for days, weeks, months, or even years if left unchecked.
Best Practices for Self-Audits
- Identify the current written plan documents. Written plan documents can include a written plan, trust agreement, and summary plan description and amendments and updates thereto. Over time, these documents may be updated and amended (either by choice or legal requirement), and several versions of the documents may begin to accumulate. While it is important to maintain historical versions of plan documents for ERISA purposes, in order to stick to the plan, fiduciaries need to know what the plan says at present. In connection with a periodic self-audit, we recommend updating and restating plan documents to form a unified set of plan documents for a plan fiduciary and its service providers to follow with confidence.
- Compare the written terms of the up-to-date plan documents with the plan’s current operational practices. Plan fiduciaries often rely on others to carry out the day-to-day administration of the plan. Regular self-audits of the plan fiduciary’s or a recordkeeper/third-party administrator’s operation of the plan as compared to the actual terms of the plan document can spot inconsistencies before a plaintiff’s firm or a regulatory agency does so.
- Act quickly to correct any inconsistencies between the plan’s terms and its operation. Many inconsistences can be self-corrected so long as they are discovered, contained, and corrected within a certain timeframe. If an error continues undiscovered for many years, it may be difficult to qualify for a self-correction and a plan may need to undergo a protracted and costly correction procedure with the Internal Revenue Service (IRS) or US Department of Labor (DOL). Regular self-audits can help fiduciaries quickly discover any accidental errors or inconsistencies and correct them before it is too late.
How Morgan Lewis Can Help
Morgan Lewis frequently assists plan sponsors with self-audits of qualified retirement plans (e.g., pension, 401(k), 403(b), ESOP plans), nonqualified plans, and health and welfare plans. This type of audit involves a review of a plan’s compliance with its written governing document and applicable laws, including ERISA, the Internal Revenue Code, healthcare laws, related regulations, and administrative interpretations and pronouncements.
Our assistance with self-audits is informed by our extensive experience representing clients that have been or are being audited by regulators such as the IRS and DOL. Our checklists and audit documentation are prepared from the checklists provided to clients by the various agencies, and we focus on the audit issues often raised during agency audits.
In addition, where Morgan Lewis assists with self-audits, it does so in its capacity as legal counsel to the plan sponsor, creating credible arguments that the communications and findings of the audit are protected by the attorney-client privilege.
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