Leveraging Plan Administration while Maintaining Your Fiduciary Responsibility

Under ERISA, employee benefit plan administrators have complete responsibility for all administrative functions of the plan. This includes everything from selecting service providers and investment management to maintaining accurate minutes that document the decision-making processes.

Selecting the third-party administrators (or TPAs) that will service a plan, as well as determining the level of service to be provided, is a major decision for fiduciaries. Often, plan administrators may decide to outsource many of the time-consuming, day-to-day processes that are necessary to administer their plans.  While leveraging administrative processes to TPAs can be an attractive option for plan administrators, it’s essential to understand the role the TPA is playing in such processes – which is that of an agent.  In the eyes of the IRS and DOL, the plan administrator retains all fiduciary responsibilities, regardless of who is physically processing transactions.

Here are just a few best practices plan administrators can follow to avoid overreliance on TPAs:

Know Who's Doing What
Start by establishing clear expectations and roles through the service agreement with the TPA. For example, will your TPA be responsible for calculating participants’ maximum contribution amounts and for monitoring the actual contributions made each year? Will the TPA communicate new rules regarding plan administration to participants? Be sure to keep a copy of the most recent service agreement and periodically review it to make certain you understand the services your TPA is providing.
Review Your Service Provider's Controls
Most of the larger TPAs issue an annual report called a Service Organization Controls (SOC) report, which provides a detailed narrative on their transaction processing and I.T. controls. The SOC report contains an independent auditor’s opinion on the effectiveness of the key internal controls, as well as the results of each control tested. Reviewing these reports is not only useful for understanding the overall control environment of the TPA, but can also be a helpful tool for understanding the difference between the controls the TPA is responsible for and the controls plan sponsors are expected to have in place.
Provide Accurate Demographic Data
Administrative processing by TPAs is only as good as the data supplied by plan administrators. If dates of service or birth are not accurate, this could result in improper vesting, eligibility or application of benefit tiers, all of which are responsibilities of the plan administrator.
Approve Loans and Distributions for Defined Contribution Retirement Plans
Often, a service agreement specifies that the plan administrator is responsible for the approval of participant loans and distributions — yet participants may initiate the requests directly with the TPA. Problems occur when plan administrators assume the TPA has provided approval simply through the act of processing the request.

A clear line between service provider functions and plan administrator functions is crucial, but it is not the only factor in maintaining fiduciary responsibility. Plan administrators have an obligation to ensure that employees are given every chance to maximize their benefits – which is done through monitoring of providers, investments, fees, and new regulations, as well as increasing employee awareness of the plans offered. We have included some basic steps below that you, as plan sponsors, can take to achieve these obligations.

Make Sure Fiduciaries Know Their Job
Some retirement plan stakeholders don’t realize that they are fiduciaries — until they get called into court to testify regarding their fiduciary conduct. Be sure that everyone who has fiduciary responsibilities understands his or her duties and is actively engaged in fulfilling them. This includes plan trustees, investment advisors, individuals exercising discretion in the administration of the plan, members of a plan’s administrative committee, and those who select committee officials.
Properly Protect Plan Fiduciaries
Contrary to popular belief, retirement plan fiduciaries are not covered by liability insurance or employment practice liability policies. The reality is that liability is personal — not corporate. Without proper coverage, a fiduciary’s personal assets are at risk in the event of a claim. The best defense is to have proper fiduciary liability insurance provided for all plan fiduciaries.
Have an Investment Committee That Meets Regularly
Of course, the investment committee should be comprised of qualified people who have the necessary training and expertise to monitor investments — and know to involve outside advisors and experts when needed. But it's just as important that the committee hold regularly scheduled meetings -  at least once per quarter is preferred, with ad hoc meetings convened as necessary. It’s also important that the committee document its decisions and decision-making process.
Monitor Plan Costs
It’s critical that fees — whether a per-participant charge or an asset-based fee to pay for administrative services — are not excessive. In particular, keep on top of benchmarking by having a routine cost analysis done annually. Fiduciaries will not be fulfilling their duty if fees have dropped but they haven’t performed a cost analysis in several years to know this.
Prudently Select (and Monitor) Plan Investments
Once an investment policy is developed, plan administrators should scrupulously follow the terms of the policy when selecting and monitoring plan investments. Don’t forget that company stock is subject to the same prudence requirements as any other plan investment.
Oversee the Plan's Administrative Processes
It’s easy to get hyper-focused on plan investments and neglect the basics of plan administration, such as remitting plan contributions on time. Ultimately, fiduciaries must ensure that plan administration is in full compliance with the plan document and all current regulations. This entails working closely with the plan's record keepers, as well as developing and monitoring procedures for the plan’s operations to ensure compliance requirements are being met.
Actively Promote Participation
Plan administrators should also do their part to encourage participation in the retirement plan and increase plan participant savings. Third parties, such as the plan vendor and adviser, can be valuable resources for developing promotion strategies, such as lunchtime Q&A sessions on retirement. Consider tapping a former employee who successfully retired from the plan to serve as a “plan ambassador” and create awareness among other employees.

By following some basic best practices, plan administrators can help with the efficient, compliant operation of the plan. At the same time, adhering to these practices can also help mitigate the liability associated with failure to fulfill their fiduciary duties.

About the Authors

James E. Merklin
James E. Merklin
CPA/CFF, CFE, CGMA, MAcc
Partner, Assurance and Advisory

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