Guest Article

Avoid Litigation by Informing Participants, Says DOL

Within the past year, the Department of Labor (DOL) has brought an increasing number of lawsuits against sponsors of defined contribution plans. A plan sponsor or fiduciary can prevent DOL action by responding to participants' inquiries and keeping them informed of pertinent plan changes, according to Virginia Smith, director of enforcement with the DOL's Pension and Welfare Benefits Administration (PWBA). In an interview with the Pension Plan Fix-it Handbook, Smith said that investigations most often occur after a participant inquires of the DOL regarding a plan. "A well-informed, alert participant is the best line of defense," she explained.

DOL Cases

Although the recent cases brought against companies by the DOL generally do not always involve large plans, the abundance of such cases marks the DOL's increased efforts to implement its Strategic Enforcement Program, according to Smith. Examples of such enforcement activity include Chao v. Bateman, in which 401(k) plan trustees were removed because they failed to timely deposit participants' contributions to their retirement accounts. Similarly, in Chao v. Mowry, the DOL charged that a now-defunct software company's plan administrator also failed to deposit plan contributions in a timely manner to participants' retirement plan.

In other recent cases, the DOL appointed fiduciaries to "orphaned" plans, such as in the case of Chao v. The International Brotherhood of Law Enforcement and Security Officers (IBLESO) Pension Plan. The IBLESO's pension plan, abandoned by its fiduciaries in 1987, was inaccessible to participants and beneficiaries, and therefore orphaned. The DOL stepped in and designated fiduciaries to terminate the plan and manage distributions to participants.

National Enforcement Projects

The DOL has focused its investigations on defined contribution plans, especially 401(k) plans, because they continue to increase in popularity and, "unlike defined benefit plans, 401(k) plans are not federally insured, and all risk of loss lies with the participant," Smith noted.

The DOL initiated the Strategic Enforcement Plan (StEP) April 6, 2000, to investigate three national investigative priorities: plan service providers, health benefit issues and defined contribution plans. Enforcement activity has increased within defined contribution plans primarily due to three national enforcement projects within defined contribution plans; the employee contributions project, the orphan plan project and the Rapid ERISA Action Team (REACT) project. Although 401(k) plans are not the focus of these projects, Smith said that much of the activity within these projects stems from these types of plans.

The employee contributions project, active since 1995, identifies instances in which plan administrators are delinquent in depositing participants' plan money. As a result, the participant loses the interest gained on such deposits, or loses the sum of the interest and the deposit, according to Smith. She also noted that the surge in the DOL's enforcement activity may be due to the newer orphan and REACT projects, started less than two years ago. The orphan project determines those plans; again, often 401(k) plans, that have been abandoned by the fiduciary, such as in the IBLESO case. The REACT project identifies plan sponsors filing for bankruptcy and intervenes to ensure that plan money remains available to its participants.

Illegal Violations

"Any way that you can violate ERISA can affect 401(k) plans," Smith said. "And, the 401(k) is not exempt from run-of-the-mill illegal activity." Although many cases involve fiduciary breaches that rise from plan administration errors, Smith reported that such violations as poor investments, party-in-interest transactions and embezzlement are not unfamiliar to the DOL. "We do see some criminal activity. One would like to think that any case is extraordinary, but there are criminals out there."

The VFC Program

Smith said that the DOL's Voluntary Fiduciary Correction (VFC) program remains the first transaction available to plan sponsors who wish to correct plan violations that may occur. The VFC program, initiated April 14, 2000, allows for 13 corrections for ERISA fiduciary breaches. Smith noted that the most common violation corrected under the program are delinquent contributions to plans, usually 401(k) plans. "We're seeing a lot of activity in this area, not only from an investigative perspective, but also in cases we don't have to investigate, because people are willing to make corrections through the VFC," she said.

IRS Collaboration Proposed

Often, plan violations under DOL rules are also violations from the perspective of the IRS, and subject to excise taxes. Smith said that the DOL is currently working on a plan for better cooperation between the two agencies, but nothing is final at this time.

Reprinted with permission from the July 2001 supplement to the Pension Plan Fix-it Handbook, © Thompson Publishing Group, Inc., 2001. All rights reserved.

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