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Aon Retirement and Investment Blog

New DOL Audits Target Plan Fiduciaries

Fiduciaries of U.S. defined benefit (“DB”) pension plans under ERISA need to be aware of, and be prepared to effectively respond to, an increasingly aggressive enforcement policy by the U.S. Department of Labor (“DOL”). During 2017, the DOL launched a nationwide audit initiative designed to assess whether DB plans and their fiduciaries are taking “reasonable measures,” to (1) timely inform and commence benefit payments to terminated vested participants when they reach normal retirement age (e.g., age 65); (2) timely commence benefit payments to participants on or before their required beginning date (i.e., April 1 of the calendar year following the later of the calendar year in which they attain age 70-1/2 or terminate employment); and (3) locate missing participants. 

When the DOL finds a fiduciary breach in one or more of these areas, they may demand that plan fiduciaries enter into a settlement agreement and take corrective actions that may require substantial changes to current administrative procedures and result in significant expense to plan sponsors. Settlement agreements may include assessment of civil penalties equal to 20% of the “applicable recovery amount.” The “applicable recovery amount” is generally any amount recovered from a plan fiduciary with respect to a fiduciary breach or ERISA violation under a settlement agreement with the DOL.
 
In certain instances, the DOL is also seeking to assert liability for ERISA breaches of duty against individual plan fiduciaries themselves, rather than just the plan sponsor. Additionally, if plan fiduciaries fail to take corrective actions, the DOL is threatening legal action. ERISA’s exclusive benefit rule requires fiduciaries to act solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing the benefits specified by a plan to such individuals. The DOL’s current enforcement policy expands the duty as previously understood by many practitioners to also include a simultaneous duty to undertake expansive and on-going efforts to locate participants and beneficiaries who may be entitled to payments under the plan. Additionally, while most sponsors have understood their general obligation under ERISA to maintain accurate and current participant data (e.g., sponsor must maintain records sufficient to determine benefits payable to covered employees pursuant to ERISA Section 209), the DOL is now enforcing that general obligation within the context of ERISA’s duties of loyalty and prudence.
 
The DOL’s recent missing participant initiative is also arguably at odds with standard language in many plan documents and plan administrative materials that require participants to keep plan fiduciaries updated with their current address and other relevant information (e.g., marital status) to ensure timely payment of benefits. As a practical matter to address the nonpayment of pension benefits, many pension plans provide for the accrued benefit to be forfeited for participants who are deemed “missing” by the plan administrator; provided, of course, that there is a restoration of the forfeited benefit in the event those participants (or beneficiaries) come forward to rightfully claim their vested benefits.   
 
Many plan fiduciaries (and their plan recordkeepers) have historically believed that reasonable efforts to commence benefit payments timely were limited to: (1) sending an annual reminder about their right to request an estimate of plan benefits; (2) distributing an annual funding notice; (3) mailing a reminder or benefit election kit prior to normal retirement age; and (4) mailing a second benefit election kit immediately before attainment of age 70-1/2. Under the recent audit initiative, the DOL has found the activities listed above as insufficient in certain instances, and has pointed to guidance it issued to its field agents in 2014 regarding the steps a defined contribution (“DC”) plan fiduciary should take to locate participants and properly pay all benefits due when a DC plan (e.g., 401(k) plan) is being terminated.
 
Among the steps outlined in the guidance (Field Assistance Bulletin (“FAB”) 2014-01) are (1) searching related plan and employment records within the possession of the sponsor; (2) utilizing a private commercial locator service; and (3) using U.S. certified mail to contact the participant. Importantly, the DOL has also emphasized that the listing of “reasonable steps” outlined in FAB 2014-01 is not meant to be exhaustive and that DB plan fiduciaries should consider other reasonable steps, including, but not limited to, attempting to reach former employees through various forms of social media or retiree newsletters. Particularly troubling, the DOL has advocated for the use of social media by plans in certain situations despite the privacy implications and possibility for fraud that such attempts might introduce.   
 
Finally, plans or sponsors involved in prior plan mergers or other restructurings (e.g., asset and liability spin-offs) resulting in name changes for a sponsor or plan may require an even higher standard of care by plan fiduciaries. In these situations, the DOL has alleged that a lack of clear communication from plans and their fiduciaries may be treated as a breach of ERISA fiduciary duties and may well result in participants failing to appreciate the significance of plan communications. In some cases, the DOL has directed plan fiduciaries to reissue certain disclosures to clarify information previously provided to participants. As a result, fiduciaries with oversight for plans that have been renamed or otherwise involved in a corporate restructuring should consider whether communications should include references to prior plan names or prior sponsoring organizations to help effectively communicate with legacy populations.
 
Since this DOL audit initiative is widespread, ongoing, and is impacting plans of all sizes, plan fiduciaries whose plans are not currently under investigation should anticipate the possibility of future DOL audit activity in this area.  In order to preempt possible adverse DOL findings, plan sponsors and their fiduciaries should make an assessment of whether their missing participant administrative practices and procedures are in line with the DOL’s expansive view of what is required under ERISA to address missing and unresponsive participants. 
 
Hitz Burton is a Partner in Aon’s Legal and Compliance Team and is based in Irvine, CA.

Content prepared for U.S. subscribers, but available to interested subscribers of other regions.

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