ERISA fiduciaries may want to identify steps they should be taking and decisions they should be considering to adjust their process in the face of the coronavirus (COVID-19) pandemic. This LawFlash identifies six such points that could be appropriate for consideration by retirement plan fiduciaries, such as fiduciary committees, as the pandemic and related economic fallout continue to evolve.
ERISA requires plan fiduciaries to act with “care, skill, prudence and diligence under the circumstances then prevailing.” This legal standard guides how the individuals and entities that serve as fiduciaries to ERISA-covered benefit plans—such as retirement plan fiduciary committees—should act and make decisions on behalf of such plans. Under this legal standard, the prevailing facts and circumstances will necessarily inform the appropriate course of action.
In 2020, the prevailing facts and circumstances include the coronavirus (COVID-19) global health pandemic and the related economic instability. Just as the world must adjust to the COVID-19 pandemic, ERISA fiduciaries must calibrate their processes to fit the pandemic environment. In fact, ERISA’s emphasis on giving consideration to such prevailing circumstances (and engaging in appropriate process in the light of those circumstances) is arguably heightened in times of social and financial turmoil. This is because fiduciary decisions made during this difficult time may be especially ripe for second-guessing by plan participants or by regulators. In the face of such second-guessing, fiduciaries will be better positioned in litigation or a regulatory investigation if they can point to a record of having considered and, as appropriate, adjusted their process to address the COVID-19 societal and economic realities.
For all these reasons, ERISA fiduciaries may want to consider some of the steps discussed below to adjust their processes in response to the COVID-19 crisis. In taking these steps, the fiduciaries should carefully document their actions to preserve a record of their due diligence. Just as having a prudent process is key to satisfying ERISA’s fiduciary standard, a ready record of that process is key to proving compliance with that standard, especially in later ligation and government inquiries.
This is a good time for ERISA plan fiduciaries to reach out to the plan’s service providers to verify the provider’s ability to handle—and adjust to—economic and societal disruption.
For example, plan fiduciaries could ask investment providers about their business continuity plans, such as the provider’s capacity to continue to manage assets during times of disruption. This can include questions about operational disruption, such as how the provider can operate during quarantine periods. Other appropriate questions could be about the role of key personnel, such as whether the organization has a backup plan should a key person become unavailable. Fiduciaries may also want to ask about investment continuity, such as the managers’ ability to continue purchases, redemptions, and valuations during future disruptions. For those managers holding assets outside of the United States, a fiduciary could inquire about whether changes in regulations or operations in those other markets have—or could in the future—adversely affect the plan’s investments. Another question could be whether there will be delays in reporting, including tax reporting, related to the plan’s investments.
The goal of this inquiry could be to confirm (and document the confirmation) that the provider appears able to continue to operate—or adjust—to future economic and societal disruptions, so that the plan is able to continue investment-related operations. If the inquiry raises any concerns, fiduciaries should consider the appropriate responses (and, again, document those responses).
After inquiring about provider operations, plan fiduciaries could next conduct a review of the plan’s investments. During this time of uncertainty, it may be appropriate for ERISA fiduciaries to review the plan’s investments and fund lineup (in the case of a defined contribution plan) to consider whether they remain prudent investments in the current market environment. For example, a key question could be whether the prospect of future market volatility warrants adjustments to the plan’s investment guidelines and/or underlying investments. Appropriate considerations could be whether the plan’s investments should be adjusted to reduce options with greater risk or to remove particular asset classes that would be expected to suffer more significantly in a volatile market. It may also be appropriate to consider the plan’s liquidity needs, and its capacity to sustain a downward market.
The market volatility may have also resulted in the need to rebalance among asset classes to maintain the plan’s desired asset allocation. The need to rebalance may also prompt fiduciaries to consider whether plan investment guidelines and investment policy statements remain appropriate.
On an ongoing basis, this may be a time for more frequent or more detailed monitoring of the performance of plan investments, especially if the markets continue to go through further rounds of volatility. For example, it may be wise to increase the frequency of formal investment reviews and benchmark exercises.
Finally, for a plan that offers employer stock, the current—and possible future—market losses may warrant considering closer or more frequent monitoring of the stock’s performance or other proactive steps, such as engaging in an independent fiduciary.
Of course, if the investment review raises concerns, fiduciaries should explore appropriate adjustments (and, again, document those adjustments).
In defined contribution plans, many participants are investing with the long view. But there can be a pool of participants—especially those nearing retirement—whose investment needs are focused on preserving investment value. Market disruptions can have an outsized effect on those participants. Fiduciaries may wish to engage with their consultants and other advisers to evaluate whether the investment options on the more conservative end of the lineup offer sufficient income preservation opportunities.
If the plan offers such options, another due diligence step could be to review those options—with the manager and/or investment consultant—to consider whether those options are, in fact, performing as they should and especially, that the options that are designed to retain value have been performing as expected.
Another action point for plan fiduciaries could be increasing participant education efforts, particularly for participant-directed defined contribution plans. If the markets continue to experience volatility, both the plan participants and the plan fiduciaries will benefit from an increased focus on educating participants to empower them to make decisions that best suit their investment and retirement goals.
For example, in addition to ensuring a defined contribution plan has adequate capital preservation options, it is helpful if participants that could best benefit from those options (such as individuals nearing retirement) are aware of those options and understand the value—and risks—of using them. For example, participants may benefit from education on the benefits of using target date funds, but also may need to be educated about the fact that such funds still carry risks, including general exposure to equity markets, even at the tail-end of their glidepath.
One step plan fiduciaries could take is to kick off—or increase the frequency of—participant education outreach, such as presentations and education literature. In the remote work environment, care could be taken to make these sessions accessible to participants, such as by setting up virtual or telephone sessions, or electronic communications. Another option would be to consider hiring a third-party education provider and/or adding a participant advice program.
Despite the challenges of the current world, fiduciary committees should not lose focus on appropriate procedures. This is not a time to stop fiduciary process. Instead, committees may need to simply adjust their processes to ensure they can continue to function and engage in an appropriate level of oversight of the plan in a virtual and “work from home” environment. For example, rather than foregoing meetings altogether because of remote work environments, committees should consider moving to virtual or telephonic meetings at least as frequently as the committee’s otherwise established or typical schedule would provide. Further, committees may actually find that more frequent meetings are necessary during this time of disruption and volatility.
These types of process changes may require amendments to the committee’s governing documents (i.e., charter or bylaws), and so now might be a good time to review such documents and to make any updates to fit the COVID-19 world. For example, committees may wish to review charter or bylaw provisions on remote attendance at meetings, to confirm that meetings and votes are effective even when no two members can be physically present in the same place.
Another potential action point for plan fiduciaries is to consider a review of the adequacy of the plan’s fraud protection mechanisms. The COVID-19 crisis may trigger increased fraud activities, because of the economic disruptions and increase in electronic communications caused by the crisis. Unfortunately, benefit plans are a prime source for fraud, given the data and assets held by such plans. There is an ever-present risk of theft of personal information (such as social security numbers), theft of retirement assets, or access to other financial accounts and information. A theft incident can be expensive, harmful to the plan and the plan sponsor, and damaging to relations with current and former employees.
The ERISA fiduciary duties of loyalty and prudence could be deemed to impose an obligation to take reasonable steps to shield participants from losses stemming from benefit plan fraud. In light of these risks, now may be a good time for plan fiduciaries to review and understand the structures that are in place to protect participant information and participant assets. This could involve inquiring with the plan’s service providers (such as the plan’s recordkeeper) and/or conducting a formal audit to evaluate how participant information is protected and what mechanisms exist to protect participants from identity theft and fraudulent benefit payouts.
The goal of this inquiry could be to confirm (and document the confirmation) that the plan has reasonable and appropriate protections in place to guard against fraud. If the inquiry raises any concerns, fiduciaries should consider the appropriate response (and, again, document those responses).
We hope the above six points are a helpful starting point for ERISA fiduciaries seeking to adjust their processes in the face of the COVID-19 pandemic. Of course, other considerations are likely to materialize as the pandemic and related economic fallout continue to evolve and so fiduciaries should be aware of the need to continue to make adjustments where necessary.
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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Lisa H. Barton
Craig A. Bitman