Does a participant have a claim for getting what he asked for?

[Peter Gulia]

Should we consider that not all claims are submitted electronically?  Of those on paper, might a recordkeeper's employee see a few hundred claim forms in a business day?  Might such an employee, even if neither under-paid nor over-worked, sometimes have a bleary-eyed moment in which he believed a question was answered with the form's Yes box checked while the claimant's actual response was a No?

Recognizing that each incremental to catch mistakes costs something, could a prudent administrator and a businesslike recordkeeper negotiate how much process and accuracy the plan wants to pay for?

[MoJo]

5 hours ago, Fiduciary Guidance Counsel said:

Should we consider that not all claims are submitted electronically?  Of those on paper, might a recordkeeper's employee see a few hundred claim forms in a business day?  Might such an employee, even if neither under-paid nor over-worked, sometimes have a bleary-eyed moment in which he believed a question was answered with the form's Yes box checked while the claimant's actual response was a No?

Recognizing that each incremental to catch mistakes costs something, could a prudent administrator and a businesslike recordkeeper negotiate how much process and accuracy the plan wants to pay for?

Sorry I disagree.  "Close enough" is a per se breach of a fiduciary duty.  Errors happen, but "acceptance" of a process that will tolerate x% errors is simply not acceptable.  The "process" itself should be designed to not produce errors, and when errors occur, the failure in the process needs to be addressed.  Anything less is philosophically not consistent with the concept of a "fiduciary."  I would suggest an increase in fees to better ensure error free processing would be the "prudent" thing to do.

Think about VCP or SCP filings - a pre-requisite to relief is ALWAYS to identify how the gaps have been plugged to best ensure it won't happen again.  Saying, we've fixed it so no more than 5% will be in error in the future won't cut it - and that isn't even dealing with the higher standard of being a fiduciary!

[Peter Gulia]

And despite my usually good work, my preceding post has a word missing.

If this had been work deliverable to a client, I might have used an assistant to double-check my work (and a client might have borne that expense).  But might some clients prefer to tolerate an imperfection?

[Peter Gulia]

MoJo, thank you for explaining a view that's helpful for me to think about.

 

[MoJo]

2 minutes ago, Fiduciary Guidance Counsel said:

And despite my usually good work, my preceding post has a word missing.

If this had been work deliverable to a client, I might have used an assistant to double-check my work (and a client might have borne that expense).  But might some clients prefer to tolerate an imperfection?

FGC:  I think our point of disagreement is what is the "effect" of that tolerance.  Yes, some would probably "tolerate" errors to save some bucks - but the "effect" is still an "imprudent" decision, and therefore a breach.

[RatherBeGolfing]

1 minute ago, MoJo said:

Sorry I disagree.  "Close enough" is a per se breach of a fiduciary duty.  Errors happen, but "acceptance" of a process that will tolerate x% errors is simply not acceptable.  The "process" itself should be designed to not produce errors, and when errors occur, the failure in the process needs to be addressed.  Anything less if philosophically not consistent with the concept of a "fiduciary."  I would suggest an increase in fees to better ensure error free processing would be the "prudent" thing to do.

Think about VCP or SCP filings - a pre-requisite to relief is ALWAYS to identify how the gaps have been plugged to best ensure it won't happen again.  Saying, we've fixed it so no more than 5% will be in error in the future won't cut it - and that isn't even dealing with the higher standard of being a fiduciary!

FWIW, I agree 100% with MoJo.

When errors happen we fix them and change the process to make sure they don't happen again.  We don't continue with the same flawed process because it is cost effective.  I would go as far as saying that a fiduciary who contracts with a service provider knowing that the process will produce errors and that the process will not be revised to prevent those errors in order to cut down cost is in breach before the error even happens.  An agreement with that flawed service provider is certainly not in the best interest of the participants, and the fiduciary's responsibility is to find a a service provider who will perform accurate work (and fix flawed processes) at a reasonable and necessary cost.

[TPAJake]

I'm +1 with MoJo & RBG

[Peter Gulia]

I get the idea that a fiduciary shouldn’t leave unimproved a known flaw in the procedure that allows errors because of the procedure’s provisions.  And I get the idea that we should not deliberately fail to correct a detected error (if there remains an opportunity to do so).

 

But at least for work done by humans, the only method I know that might reduce errors to zero is reinspection of each worker’s work.  And what if a reinspector makes a mistake?

 

Some might interpret ERISA § 404(a)(1) as stating several commands, some of which might sometimes bear some internal tension.  And such an interpretation might lead to harmonizing those commands following a retirement plan’s purpose.

 

Section 404(a)(1)(B) refers to “the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims[.]”

 

Yet one might read § 404(a)(1)(D)’s command to administer a plan “in accordance with the documents and instruments governing the plan” as calling for perfect fidelity to a plan’s provisions.

 

But could such a reading conflict, at least at the margin, with § 404(a)(1)(A)’s command that a fiduciary discharge its duties “for the exclusive purpose of providing benefits to participants and their beneficiaries; and defraying reasonable expenses of administering the plan”?

 

If participants’ accounts bear the expenses, is it always “solely in the interest of the participants and beneficiaries” to reduce to zero the probability of mistaken claims decisions (especially if an unreviewed mistake grants a participant what he or she asked for)?

 

Perhaps in the fall semester I’ll invite my ERISA Fiduciary Responsibility law students to research and write about these questions.

 

Thank you for a thoughtful discussion.

 

[MoJo]

3 hours ago, Fiduciary Guidance Counsel said:

 

But at least for work done by humans, the only method I know that might reduce errors to zero is reinspection of each worker’s work.  And what if a reinspector makes a mistake?

 

....

 

Section 404(a)(1)(B) refers to “the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims[.]”

 

....

 

 

If participants’ accounts bear the expenses, is it always “solely in the interest of the participants and beneficiaries” to reduce to zero the probability of mistaken claims decisions (especially if an unreviewed mistake grants a participant what he or she asked for)?

 

Perhaps in the fall semester I’ll invite my ERISA Fiduciary Responsibility law students to research and write about these questions.

 

Thank you for a thoughtful discussion.

 

I think you answer your own question when you cite Section 401(a)(1)(B) - in that the question is one of "prudence" as one familiar with such matters would interpret it to be.  There is a difference between "human error" and "sloppy work" that produces errors.  Mistakes happen.  Figure out why and correct accordingly.  If it's "systemic" fix the system.  If it's human error, then either train the "humans" producing the error(s) or do exactly what you say and implement a QC process (which might involve double checking).  For our "document work, we do just that (100% peer review).  For "outsourced" hardships, there are QC processes in place.

I would interpret the "prudence" requirement to be the (highest) standards of professionalism in the industry.  When it comes to the nuts and bolts services we provide, 100% error free is the goal, and any error triggers a review of root cause.  Systemic errors (including process deficiencies) are changed - and a cost/benefit analysis is not done to determine if we make the change or not.  We make the change.  Human errors are also dealt with.  Some teams have policies that "write you up" if peer review produces errors over a certain threshold and too many write ups can (and does) result in termination (with a lot of coaching between initial error and termination).

Regardless of how little we charge a client, I can with almost certainty say that none of them would accept errors for a discounted price.

[Luke Bailey]

I have not read all of the posts on this topic word for word, but isn't the distribution an operational 401(a) violation that can be self-corrected by requesting that the employee repay the amount distributed? If that is the case, then any damage to the participant can be avoided by his/her repaying the amount to the plan.

[Peter Gulia]

Luke Bailey, thank you for that helpful observation.  In setting up my originating question, I didn’t pause to consider that idea.  A plan’s administrator might respond to a participant’s complaint by inviting her to return the money she says she wasn’t entitled to.

 

[RatherBeGolfing]

What about the participant that is unable to return the money to the plan?

[Peter Gulia]

If a participant sues the plan’s administrator for its fiduciary breach in approving a hardship claim it ought to have denied, the administrator might use the plan’s readiness to accept a repayment and the participant’s failure to repay to support several arguments, including:

 

The participant lacks standing to pursue the plan’s loss.

 

Because the participant had the use of the money, the participant’s plan account didn’t suffer a loss.

 

The payment of the unentitled distribution was a nonexempt prohibited transaction [see also ERISA § 408(c)(1)], equitable relief [ERISA § 502(a)(3)] can be had from any person, and restoration or disgorgement should be had from the party-in-interest who received the proceeds of the prohibited transaction.

 

Ordering the breaching fiduciary to restore the incorrectly paid amount to the participant’s plan account (without relief from the distributee) would afford a windfall to the participant, and the court instead should order equitable relief to avoid such an unconscientious result.

 

[My 2 cents]

Isn't there another ongoing thread, concerning someone who took a hardship withdrawal to buy a house but the sale fell through, coming to the conclusion that it cannot be returned, end of discussion.  So in this instance, where no sufficient reason was given for a hardship withdrawal but it was granted anyway, how could allowing the proceeds to be returned to the plan be an acceptable course of action?

[MoJo]

23 minutes ago, My 2 cents said:

Isn't there another ongoing thread, concerning someone who took a hardship withdrawal to buy a house but the sale fell through, coming to the conclusion that it cannot be returned, end of discussion.  So in this instance, where no sufficient reason was given for a hardship withdrawal but it was granted anyway, how could allowing the proceeds to be returned to the plan be an acceptable course of action?

The difference between the other scenario and this one is that in the house sale falling through issue the hardship was properly granted - as a hardship condition existed at the time of the distribution.  In the case in this thread, the hardship distribution was not properly granted, as no hardship existed, making it an least an operational error that needs to be corrected.

[RatherBeGolfing]

19 minutes ago, My 2 cents said:

Isn't there another ongoing thread, concerning someone who took a hardship withdrawal to buy a house but the sale fell through, coming to the conclusion that it cannot be returned, end of discussion.  So in this instance, where no sufficient reason was given for a hardship withdrawal but it was granted anyway, how could allowing the proceeds to be returned to the plan be an acceptable course of action?

In the first example, the distribution was correct because at the time, there was a legitimate hardship.  The fact that the purchase fell through doesn't matter, and you can't return a hardship that was correctly distributed.  There is no error to correct and you can't just return a legitimate hardship because you no longer need the money.

In the second example (this thread) the hardship was approved in error, and the participant was never actually entitled to the distribution.  What Luke and Peter has pointed out is that the distribution would be an operational defect that can be corrected by reversing the error, or in other words, returning the money.