Liability in a Litigious Environment
Ways to potentially reduce your fiduciary liability
By: Vincent Galindo, Consultant, Arnerich Massena & Associates
Liability in a Litigious Environment “Fiduciary liability” may seem like just two words on a page, but in a litigious environment, they can turn into reality quickly. As participants watch their accounts dwindle, they may understandably experience anger; it is a natural response to look for a culprit and point fingers. Unfortunately, in this era, that occasionally translates into seeking someone to sue. Now, perhaps more than ever, is a time to carefully review your fiduciary responsibilities and make sure that your processes and documents are in order. Following is a list to help you review your plan for potential areas of exposure to liability. Review your Investment Policy Statement Your Investment Policy Statement (IPS) should establish clear guidelines for investment decisions. It should include the criteria for fund selection, monitoring investment options, and the process for fund changes and terminations. The more explicit the IPS is, the less likely anyone is to find gaps or omissions. On the other hand, a policy that is too rigid may not be effective. An IPS should be rules-based but flexible enough to give committee members some discretion. Most importantly, make sure that your committee’s actions actually follow the guidelines set out in the IPS and work to align any inconsistencies. Keep a committee charter and maintain documentation. The committee charter is as fundamental to a plan’s documents as the IPS. The charter should address the selection and appointment of committee members and note how often regular committee meetings should occur. It should also specify which activities the committee is responsible for, such as coordinating vendor analysis and recommending plan design features. The charter should also identify to whom the committee needs to provide recommendations and any governing bodies it must consult. Meeting minutes, reports, and any other pertinent documentation should be carefully maintained and organized. Documents should be readily accessible and decisions easy to track. Provide appropriate information to participants. Participants must have access to a Summary Plan Description, a Summary of Material Modification (informing participants of any plan changes), a Summary Annual Report, and any Blackout Period Notices. Make sure these reports are up-to-date and that participants know how to access them. Monitor your service providers. Your fiduciary responsibility extends beyond selecting and monitoring investment options to selecting and monitoring service providers. Maintain records of any research and due diligence and regularly review your contracts to make sure the services provided and fees charged are still reasonable, in line with, and appropriate for your plan’s needs. Avoid prohibited transactions It may be a good idea to occasionally audit your plan for potential prohibited transactions. The prevention of prohibited transactions is meant to protect participants from fiduciaries acting with a conflict of interest. This is a starting point for reviewing your plan and not an exhaustive description. Your advisor or service provider may be able to assist you in navigating through the complexities of fiduciary responsibilities and help you identify potential areas of liability exposure. Most of all, you should feel confident that your committee is acting prudently and solely on the behalf of your participants.
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