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Multiemployer Pension Plan Reform: So Now What?

Posted in Plan Administration, Retirement Plans, Withdrawal Liability

When the House passed the most recent budget bill, it included a provision related to multiemployer pension plan reform.  In my last post, I suggested it might be too early to count on anything being final in that bill until it made it into law.  Well, go ahead and start considering it because not only did the Senate pass it, but President Obama signed into law.  And some professionals are touting it as the most comprehensive legislation affecting multiemployer pension plans since the Multiemployer Pension Plan Amendments Act of 1980.

The PBGC has a component called the “multiemployer pension insurance program” which is, according to the PBGC, going to be insolvent in 10 years.  The idea behind the “Multiemployer Pension Reform Act of 2014” is that by making certain changes to multiemployer pension plans, and specifically to underfunded pension plans, PBGC finances will improve.  Of course the first part of this repair is that the annual PBGC insurance premiums for multiemployer plans will double to $26 per participant in 2015, and increase over time.

Along with premium increase come certain specific changes for multiemployer pension plans.  First, some multiemployer funds will be permitted to reduce the pension benefits of plan participants, including benefits for some retirees already receiving benefits.  This is a pretty significant change because it would allow for a cutback of benefits provided certain criteria are met.  It requires a vote of all participants, including actives and retirees, but that vote can be overridden by Treasury if it concludes the pension plan is a “systemically important plan.”  What that means is that it is a plan that the PBGC projects will need more than $1 billion in financial assistance if the reductions are not made.

Second, under the PPA, we created “yellow zone(endangered)” and “red zone(critical)” designations for plans.  Now, plans in these zones will be given additional options in making their annual funding determinations.  This also removes the PPA sunset provision that was expected to expire at the end of this year.  Third, funds must now disregard surcharges that were imposed under the PPA when calculating an employer’s withdrawal liability.   This should cause future withdrawal liability to be reduced, assuming the plan funding status otherwise improves.

Finally, the act gives the PBGC added options when dealing with how it will allocate liabilities resulting from employers who withdrew from a plan and could not pay their withdrawal liability or contributions (say in bankruptcy).  Plus the PBGC will also be able to be more flexible in facilitating merger of plans, particularly if the proposed merger improves the “aggregate funded status” of the merged plan.

So, all things being equal, the Act should have a positive impact on employers who withdraw from multiemployer funds in the future because it is designed to help plans improved their funding status.  However, whether or not funds will take corrective actions, and whether funds will follow these rules remains to be seen.  Going forward, then, employers considering withdrawing from a multiemployer pension fund should make themselves aware of the options available to funds and see if they can determine what steps the fund may be taking under the Act.  And fund trustees should be carefully considering what steps the fund should be taking to respond to the available options.  This is not an elimination of withdrawal liability, but it is the first development in a while that provides some potential relief.

Proposed Multiemployer Pension Reform: Don’t Count Your Chickens Before they Pass

Posted in Plan Administration, Retirement Plans, Withdrawal Liability

Employers participating in multiemployer pension plans are in a constant state of hope that some relief is coming from Congress that will reduce or eliminate unfunded liability and do away with withdrawal liability.  So something like Klein -Miller provision in the budget passed by the House of Representatives last night gets some real attention.  Media outlets are reporting that this is either a massive cutback of retiree benefits, or a complete overhaul of the multiemployer pension system, so you can safely assume it is probably neither.  So before employers start popping the corks about reducing withdrawal liability, let’s look at what is really being proposed.

The PBGC is basically broke, primarily because, at least with respect to that portion that insures multiemployer pension plans, the premiums charged have been ridiculously low.  Since the PBGC insures the plans (subject to various limitations and restrictions), substantially underfunded multiemployer pension plans cause real concern for the agency and Congress over how to pay for the impending doom associated with the possible collapse of these funds.  So they took two big steps.  They raised the PBGC premiums and they made it a little easier for trustees of multiemployer pension plans to act to reduce the underfunded status.  In the process, they cleared up a fight over how to calculate withdrawal liability and passed it over to the Senate.

First, the new rules allow the trustees in “critical and declining” plans to seek approval to “suspend” benefits to no less than 110% of PBGC minimums to the extent needed to avoid insolvency (with various exceptions and limitations).  Plus, trustees are given added protections against claims by retirees for breaches of duty if they decided to make pension cuts.  Second, the new rules significantly revise existing merger and participation rules, which in turn make it easier to have plan mergers.  Plus it allows for the PBGC to provide financial assistance where one of the plans to be merged is in critical and declining status (with various limitations and restrictions).  Third, and most relevant to employers, the new rules clarify that surcharges imposed pursuant to the Pension Protection Act do not count towards calculation of withdrawal liability payments as the “highest contribution rate” against which annual payment limits are calculated.  This has been arbitrated and litigated for some time and it would serve in many instances to reduce withdrawal liability payments.  They also provide that contribution increases mandated by a rehabilitation or funding improvement plan also will be disregarded in certain withdrawal circumstances.  

Note:  Before calling your attorney to discuss how to reduce payments you are making because you have already withdrawn, or to argue about a withdrawal you settled already, remember that the proposed changes would, if passed, only apply to employers who withdraw AFTER the provisions take effect.

So, what’s next?  Well, laws do not become laws simply because the House passed them.  There is has already been heavy anti-reform commentary coming from organized labor and Democrats in the Senate.  Plus, the Senate might have ideas about how to improve things that are different than what the House proposes.  And who knows what the President would do if presented with a final version.  But it is nice to see that there is some discussion about relief, and even better that it actually made it through one side of Congress.  Just don’t start celebrating until the final buzzer.

Investment Policy Statements in Retirement Plans: Are They Plan Documents?

Posted in Court Cases, Plan Administration, Retirement Plans

In prior posts, I have discussed the importance of having up-to-date investment policy statements.  Not only are they a good proof of diligence on the part of fiduciaries (assuming they are followed) but they also serve as a sort of check list to verify that appropriate investment options are being offered.  But are they plan documents and do they actually have to be provided to participants upon request? 

First, let me say that I am a fan of providing participants almost anything they ask for just to support a contention that they have all relevant information.  But on top of that, ERISA requires plan sponsors to provide certain “plan documents” to participants upon request.  Under ERISA, a plan administrator must, upon written request of any participant or beneficiary, furnish various documents, including a copy of the latest updated summary plan description and any “contract, or other instrument under which a plan is established or operated” and it seems logical that the investment policy statement is a document under which a plan is operated.  But there is a mild conflict between the Circuits about whether a request for plan documents includes the obligation to provide a copy of the investment policy statement.

A recent case out of the Fifth Circuit highlights the confusion.  In Murphy v. Verizon Commc’ns, Inc., the Court of Appeals for the Fifth Circuit was asked specifically to consider whether plan investment guidelines must be provided upon request to plan participants and beneficiaries.  The Court looked at the requirements in ERISA and determined that the real question was one as to whether the investment policy statement was actually binding on the operation of the plan.  The Court held that the disclosure requirement of ERISA should be narrowly interpreted, applying only to formal documents governing the plan.   Since the participant did not claim that the guidelines were binding or mandatory in plan operation, they did not have to be disclosed. 

Now under the Sixth Circuit and, to some extent, the Ninth Circuit, the determination would have been less cumbersome because these courts generally favor disclosure of any documents that help participants understand their rights and benefits.  This decision seems closer to the ones in the Second, Fourth, Seventh, and Eight Circuits that generally favor the idea that plan documents related to the operation of the plan are the ones to be disclosed, not every available document.  Either way, there seems to be a clear suggestion that there is a preference to providing a copy of the investment policy statement whenever a participant makes a request for plan documentation. 

So why write about this?  Well, it is a Circuit Court decision that means not only was there a lower court case but there was an appeal.  And all of this over the failure to provide a document.  Plan administrators have a duty to respond to requests for documentation from participants and that includes all documents governing the operation of the plan.  This would seem to include investment policy statements, which further confirms that plans should have one in writing to provide.  To avoid litigation like this, sponsors and administrators should make sure they have current statements, and make sure that they provide them to participants if they are requested.  Otherwise, you might end up being the subject of an article like this in the future.

Down to the Wire: Some Thoughts on ACA Compliance as We Approach 1/1/15

Posted in Plan Administration, Welfare Plans

As we get closer to the January 1, 2015 compliance deadline for large employers under the ACA, I have been inundated with several “last-minute” compliance items that continue to puzzle employers and professionals alike. Here are a few of the most common:

If you are between 50 and 99 FTEs, you might be eligible for transition relief, but it is not automatic. An employer with fewer than 100 FTEs may be exempt from penalties if three conditions are met:

  1. That during 2014, the employer can show that for any consecutive six-month period, it had fewer than 100 FTEs.
  2. That between 2/9/14 and 12/31/14, the employer can show that any reduction in hours or reduction in workforce was based on a legitimate business reason and not simply to avoid the compliance mandate.
  3. That from 2/9/14 through the last day of the plan year that begins in 2015, the employer must keep the same coverage and employer contribution toward the cost of self-only coverage that was in place on 2/9/14.

If you are between 50 and 99 FTEs, and meet these conditions, then you would avoid the pay-or-plan penalties.

To determine whether or not you are an applicable large employer, you have to look at the controlled group, not the individual company. §414(c) of the Internal Revenue Code provides the rules for determining when a controlled group exists, but a key consideration is commonality of ownership. Employers with fewer than 100 FTEs may still be subject to the “pay or play” penalties if they are part of a controlled group that has more than 100 FTEs (for 2015). ACA looks at the entire controlled group for size so if there is any commonality of ownership between two companies, they should be carefully reviewed to see if there is a controlled group.

Seasonal workers that work 120 days or fewer during all of 2014 are not counted for purposes of determining whether the company is a large employer. But if they exceed 120 days in the calendar year, they cannot be ignored for the count and should be added to your FTE calculation.

Employers cannot satisfy the obligation to offer coverage to employee by reimbursing them for premiums paid through the exchange. This applies whether the reimbursement if pre-tax, post-tax or through a Section 105 plan. While an employer can still offer cash in lieu of participation under Section 125, the offer cannot be made exclusively to high risk individuals. It has to be made available to all employees to avoid discrimination concerns.

The measurement of affordability for coverage is based on the employee-only coverage of the lowest compliant plan. It is not based on family coverage, although coverage must be made available to dependents (excluding spouse). It is not a requirement that every option offered under the plan is affordable, but rather that all full time employees are eligible for at least one affordable plan offering that provides compliant coverage.

To avoid a payment for failing to offer health coverage, large employers (that’s more than 100 in 2015) need to offer coverage to 70 percent of their full-time employees in 2015. The 95% rule goes into effect in 2016. But satisfying the 70% rules only goes to the $2,000 per employee penalty, not the $3,000 penalty. This means that an employer with 100 or more full-time employees that offers coverage to at least 70% of its full-time employees in 2015 can still face a penalty if it has one or more full-time employee who goes to the exchange and receives a premium tax credit for participation in the exchange.

I am sure there will be more as we get ever closer to the first day of the 2015 calendar year. However, consider the following: if the objective of the ACA is to make sure that employers provide affordable coverage to full-time employees, any steps an employer takes to avoid that offer of coverage probably has something fishy about it. Not to say it can’t be done, but when in doubt, the safest way to avoid penalties is to offer compliant coverage. If you are thinking of ways to avoid making an offer of coverage, chances are that there is something you are missing. Err on the side of making coverage available and reduce your risk of penalties. I have said numerous times that good plan sponsors want to avoid being the test case when it comes to compliance. Don’t be the first “bad example” for ACA compliance.

Is Self-Insuring the Answer? It Depends on the Question

Posted in Plan Administration, Welfare Plans

As we bear down on the first date of compliance with the ACA, much has been written about the benefit of shifting coverage to a self-funded plan because self-funded plans are not subject to many of the requirements of the ACA.  The suggestion is that self-funding might actually be more affordable that simply purchasing insured coverage.  But cost cannot be the only consideration.  So how does one decide to self-insure a health plan or go the fully-insured route?  Insurance premiums continue to go up, but on the other hand, self-insuring a plan has its own set of risks and burdens to consider.  So what are some of the things to think about when considering either option?  Here are some issues that I commonly see related to that decision.

Remember that when a plan is self-insured, it means the employer is paying all of the health care costs plus administration costs—not “just” premiums.  So the employer bears the risks and is ultimately on the hook for the costs of coverage and the employer, as plan sponsor, has the responsibility for ensuring proper administration and compliance.  Plan sponsors of self-insured plans are faced with real dollar-value problems related to high claims levels, maintaining adequate stop loss coverage (and premiums for that coverage) and fluctuating costs of new treatments and medications.  On the other hand, they are not paying for risk of other employers and their exposure is limited, to some extent, to actual claims.  So the actual dollars spent on claims in a given year can be significantly lower than one would pay for comparable insurance coverage.

Insured plans work so that the insurance company is ultimately responsible for the health care costs and the employer pays premiums.  The only costs concern is the premium dollars.  The insurance company bears the risk (which is built into the premium) so fluctuating costs and unexpected high dollar claims are simply absorbed by the carrier.  Sure, they might increase your premiums next year, but a catastrophic high dollar claim won’t immediately impact the company bottom line.  Plus, most costs of administration are borne by the insurance carrier, not the employer.

Most companies that move to self-insured plans do so because of the size of their population because it becomes less expensive for them to pay for all of the medical expenses than to pay the premiums required by the insurance company to take on the risk.  Smaller companies can consider self-insuring as an option, but they have to be wary of the possibility that significant claims costs can adversely impact revenue streams.  Companies with stable populations or populations with younger, single employees seem to statistically have lower claims experience and might be better candidates for self-insuring.  However, population stability can be tricky to maintain and companies should be keenly aware of anti-discrimination laws protecting employees based on age and marital status (in other words, don’t create a policy of only hiring 25 year old single men to keep health costs low).

Of course any discussion of plan funding should start with an understanding of your annual claims experience, preferably measured over a period of time.  If you are thinking of going to a self-insured plan, or going from self-insured to fully insured, it is best to know what your claims history actually looks like.  It may be that simple plan design changes can be made that make your current funding status more affordable.  And don’t forget the obligations related to being a plan sponsor and the notice and documentation requirements.  Even if the employer contracts out for administration services, the obligations of compliance still fall to the employer.  And don’t forget about discrimination testing.  Self-funded plans are subject to testing requirements that are not in place for insured plans.  Plus there are the added reporting requirements of being self-funded.  The annual cost of these types of administrative issues has to be taken into account before making a final determination.  And there is the need for more professionals, like lawyers, administrators and consultants.

In the end, no one can say automatically which option is best for your plan.  It is a conversation that you might want to have with your broker, benefits adviser or legal counsel.  It should not be just about cost, but also about capacity and capabilities and the administration of a self-funded plan can place a substantial burden on company employees charged with maintaining the plan, particularly if they are not familiar with how benefit plans operate.  So don’t make a decision based on a blog you read on the Internet.  Make it based on the facts specific to your company’s needs and abilities.  In the end, the real question is what works best for your company.

Can I Have A “Skinny” Plan? ACA and the Minimum Value Plan

Posted in Plan Administration, Welfare Plans

No question that employers have been struggling with how to satisfy the ACA requirements of offering coverage while still avoiding what is perceived to be a heavy burned financially of offering full coverage.  Some employers in this situation have considered offering a new type of plan to full-time employees, called a “minimum value” plan.  From that concept derived a type of plan called a “skinny” plan that provides coverage for some medical services, but excludes coverage for others like inpatient hospital services, or possibly physician services.

In IRS Notice 2014-69, there is some clarification that these skinny plans (plans that offer limited or no coverage for in-patient hospitalization services and/or physician services) will not provide “minimum value” under the health reform law.  But then they give a one year extension to offer that coverage if it is already in place.  In order to take advantage of this extension, there are two conditions:

  1. The employer must have a binding written commitment to adopt or began enrolling employees into a skinny plan prior to November 4, 2014.
  2. The employer must have relied on the results of the MV Calculator to determine whether the plan offered minimum value coverage.

Of course more regulation is anticipated, and it is anticipated that  when final regulations are issued, they will not apply to these plans immediately if the above criteria are satisfied.  These plans will be considered minimum value for the purposes of the employer mandate until the end of the plan year as long as the plan year commences prior to March 1, 2015.

If an employer decides to offer a minimum value plan that does not include inpatient hospital or physician services, the employer has to be careful about its disclosures to employees.  First, it must not state or imply that the offer of coverage under the skinny plan prevents an employee from obtaining a premium tax credit in the exchange.  Second, the employer must correct any prior disclosure which implied that the offer of the skinny plan would prevent an employee from being eligible for the subsidies.  This is because employees are not required to consider skinny plans when looking to obtain subsidies for exchange participation.

Based on this notice, it appears fairly clear that if an employer does not already have a skinny plan in place, they can’t create one.  If they have created one, it is a temporary fix, not a permanent solution.  Finally, since they took the time to issue regulations specific to these plans, it should be anticipated that they will be pretty heavily scrutinized if an employer determines to offer it.  But the rules are out there.  So if you decide to maintain a skinny plan, make sure you know what the true limitations are and stay aware of the possibility of future changes to the limits on such an offering.

Can Employers Pay for Employees in Exchanges? No.

Posted in Plan Administration, Welfare Plans

On November 6, the DOL issued FAQ Part 22, which directly addresses some recent efforts by employers to reimburse employees for participation in the exchange through Code Section 105, or through some type of other arrangement.  Here are the questions, with shortened answers.  For a complete copy of the notice, click this link.

Q1: My employer offers employees cash to reimburse the purchase of an individual market policy.  Does this arrangement comply with the market reforms?

No.  If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer’s payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee.  Under the Departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.

Q2: My employer offers employees with high claims risk a choice between enrollment in its standard group health plan or cash.  Does this comply with the market reforms?

No.  PHS Act section 2705, as well as the nondiscrimination provisions of ERISA and HIPAA prohibit discrimination based on one or more health factors.  Offering, only to employees with a high claims risk, a choice between enrollment in the standard group health plan or cash, constitutes such discrimination.  Also, because the choice between taxable cash and a tax-favored qualified benefit (the election of coverage under the group health plan) is required to be a Code section 125 cafeteria plan, imposing an effective additional cost to elect coverage under the group health plan could, depending on the facts and circumstances, also result in discrimination in favor of highly compensated individuals in violation of the Code section 125 cafeteria plan nondiscrimination rules.

Q3:  A vendor markets a product to employers claiming that employers can cancel their group policies, set up a Code section 105 reimbursement plan that works with health insurance brokers or agents to help employees select individual insurance policies, and allow eligible employees to access the premium tax credits for Marketplace coverage.  Is this permissible?

No.  The Departments have been informed that some vendors are marketing such products.  However, these arrangements are problematic for several reasons.  First, the arrangements  are themselves group health plans and, therefore, employees participating in such arrangements are ineligible for premium tax credits for Marketplace coverage.  The mere fact that the employer does not get involved with an employee’s individual selection or purchase of an individual health insurance policy does not prevent the arrangement from being a group health plan.  Second, such arrangements are subject to the market reform provisions of the Affordable Care Act, including  prohibition on annual limits and the requirement to provide certain preventive services without cost sharing.  Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code.

So if you are thinking the solution to compliance is to simply pay for your employee to participate in the exchange, make sure you understand the answers to these questions.  Clearly the department is aware that employer have considered this as a solution and are giving it careful scrutiny.

Thoughts Post-Election: Don’t Count on Changes to the ACA Until They Actually Happen

Posted in Plan Administration, Retirement Plans, Welfare Plans

As soon as the mid-term races were called, I started to get e-mails from people wondering about the potential impact the change to a Republican controlled Congress would have on ACA compliance.  My general response: don’t expect any immediate relief or changes and keep on working toward compliance.  Changes in the law might eventually come, but the administration still remains the same.

The problem with trying to anticipate potential changes to the ACA based on a revised Congressional make-up is that so much of the “law” relies on regulations.  Rules and interpretation of the law is not something controlled by Congress directly.  So while Congress may eventually change the law, the regulations we are dealing with now anticipate the current effective dates, most of which start on January 1, 2015.  Nothing is going to change between now and then.  Throughout 2015, there might be some changes to the law, but as we have seen with the struggle to write regulations, those don’t happen immediately.  It will take time to implement changes that back away from the change we are presently implementing because of the implementation of the Act in the first place.

The same can be said for benefit administration beyond ACA compliance.  Changes in control of Congress rarely have an immediate impact on the rules and regulations governing plan administration.  Instead, they are more likely to change to focus from one area of law to another.  Employers and sponsors would be well served by continuing their present course of ACA compliance efforts instead of hoping for repeal.  What changes we may see will not likely be as monumental and the implementation of the ACA itself.

That said, I do think that 2015 is going to be a bumpy ride for compliance, so make sure to keep in contact with your benefits professionals and see how things develop.

IRS Announces Cost of Living Adjustments for Qualified Retirement Plans

Posted in Plan Administration, Retirement Plans

Susan Jordan, my partner in Pittsburgh, propvides me with the following:

In a news release (IR-2014-99) on October 23, 2014, the IRS announced the cost-of-living adjustments to the various dollar limitations applicable to qualified retirement plans for 2015.  As had been widely predicted, most of the limitations have been increased.

1.         LIMIT ON COMPENSATION:  The maximum amount of compensation that may be counted for plan purposes for plan years beginning in 2015 is $265,000, up $5,000 from the $260,000 limitation applicable in 2014.  This limitation applies for calendar year 2015 and for limitation years beginning in 2015.

2.         LIMITS ON CONTRIBUTIONS AND BENEFITS.  The maximum limit on annual additions to a defined contribution plan is increased from $52,000 to $53,000. However, the maximum annual benefit which may be accrued under a defined benefit plan remains unchanged at $210,000.  These limitations are applicable for calendar year 2015 and for limitation years ending within 2015.

3.         401(k) and 403(b) DEFERRAL LIMIT.  For purposes of 401(k) and 403(b) plans, the maximum limitation on voluntary salary deferrals is increased for calendar year 2015 from $17,500 to $18,000, and the limit on catch-up deferrals by those age 50 or older, which had been fixed for the last six years at $5,500, is bumped up to $6,000.

4.         IDENTIFICATION OF HIGHLY COMPENSATED AND KEY EMPLOYEES.   Effective for plan years beginning in 2015, a Highly Compensated Employee is any employee who (a) was a 5% owner during the current or preceding year, or (b) who received compensation from the employer during the preceding year in excess of $120,000. This compensation threshold had been set at $115,000 since  2012.  The dollar limit used to define a key employee in a top heavy plan under IRC Section 416(i)(1)(A)(i), however, remains unchanged at $170,000.

5.         SEP THRESHOLDThe compensation minimum for which coverage is required for a simplified employee pension plan (SEP) is increased from  $550 to $600.

6.         TAXABLE WAGE BASE.  As announced by the Social Security Administration on October 22, 2014,  the Social Security taxable wage base for 2015 will be $118,500, an increase of just 1.28% from $117,000 which was the wage base for 2014.  For plan years which operate on a fiscal year basis, this wage base will be effective for plan years beginning in 2015.

*   *   *  *   *   *   *   *   *

We frequently are asked to provide the contribution formula needed to maximize contributions for an individual with compensation at or above the maximum limit.  The following have been calculated based on the new wage base and these cost-of-living adjustments:

For a calendar year profit sharing plan integrated at the Social Security wage base, the contribution formula needed to achieve the maximum permissible allocation for an individual with compensation of $265,000 or more is:

16.84886% up to $118,500, plus 22.54886% in excess of $118,500 (up to $265,000)

For a calendar year 401(k) plan integrated at the Social Security wage base and using the 3% safe harbor design, the profit sharing contribution formula which, in the aggregate (with a $18,000 deferral and $7,950 safe harbor contribution), will achieve the  maximum permissible allocation for an individual with compensation of $265,000 or more is:

7.05641% up to $118,500, plus 12.75641% in excess of $118,500 (up to $265,000)

To Have an Expert or Not: A Fiduciary’s Quandary

Posted in Plan Administration, Retirement Plans, Welfare Plans

I am working on some cases now that involve allegations of misuse of an expert by a fiduciary of a benefit plan.  Consequently, I have been reading a lot of articles and cases relating to the fiduciary duty and expert advice.  As a result, I can see where fiduciaries could have a real question about their duty to retain experts and the restrictions on relaying on expert advice.

Generally, the only real requirement for someone to act as a fiduciary of a benefit plan under ERISA is that they be a “reasonably prudent person” and that they act with diligence and due care.  That is the essence of ERISA Section 404.  However, Section 404 includes that the measurement of care is based on a reasonable person “familiar with such matters.”  Thus, the law recognizes that someone could possibly have to look outside of their own knowledge in order to be acting reasonably.  But it is not automatically required.  Again, the standard is one of reasonable prudence, so a fiduciary is not required to substitute their own knowledge for that of another if the fiduciary has a certain skill.

What this means is that the process of selecting and relying on an expert requires a fiduciary to go deeper than simply selecting someone who claims to know more than the fiduciary.  Assuming the fiduciary determines that a reasonably prudent person would seek outside advice, the fiduciary then has to determine from whom the advice should be sought.  The due diligence of investigating and selecting someone who does in fact have an expertise defines whether a fiduciary can rely on the advice.  Simply put, you can’t rely on an expert if you have not first determined them to be an expert and that is only done through investigating their qualifications.

Assuming a fiduciary has diligently selected an expert, the next question is whether the fiduciary can rely on the advice given.  In order to do that, the trustee has to reasonably understand the advice given.  In other words, the fiduciary has to demonstrate that they understood what the expert has opined and why.  How and why are the important questions…why did you reach this conclusion and how did you get there?  Fiduciaries have to show the understood the rationale, not just the recommended action.

This last part creates the quandary because sometimes it can be reasonable to reject expert advice.  A fiduciary is not always required to replace their own knowledge and skill with that of an “expert.”  A fiduciary should recognize that they have the duty to act and they will be judged on those actions, not the expert.  So a fiduciary who does not agree with the rationale provided by the outside expert should not blindly agree to an action simply because the advice came from an expert.  This is not to suggest that expert advice should be easily rejected or ignored.  But expert advice does not replace the knowledge and skill of the reasonable fiduciary.

Having experts is not a bad thing.  And relying on experts is generally good when it is a topic about which a fiduciary has no knowledge.  But don’t assume that using an expert will be an insulator from any claim for breach of duty.  It only helps if it is truly an area where an expert is needed, they were properly selected and you understand their advice.