DOL's VFCP--all hat, no cattle?

[Guest erisafried]

I have been having a running gun battle with various colleagues over the past few years about whether the Voluntary Fiduciary Correction Program the DOL operates is really worth a hoot. Don't get me wrong--I am all in favor of correcting defects of all sorts when they rear their ugly little heads. What I am trying to figure out is whether a fiduciary really gains anything substantial by using the VFCP program rather than just implementing some sort of reasonable self correction (I am not talking about "aggressive" sorts of corrections that the DOL might quarrel with).

As an ERISA attorney, I have dealt with a number of situations that were arguably fiduciary breaches. In every instance, after looking at VFCP vs. self-correction, I really couldn't make compelling case for jumping through the VFCP hoops, at least not under the prior version of the program. I noted that the DOL has reported a substantial up-tick in the use of the program over the past year, and I know another ERISA attorney who swears by it, but I can't help but think that the increase in usage is attributable mainly to post-Enron jitters rather than to the program's added value.

I suppose the obvious benefit of the program is that you get the DOL's stamp of approval on your corrective action and its promise not to come investigate you or sue for the issue you addressed. Of course, if you identify a potential fiduciary breach and correct it using a reasonable methodology, you take most if not all of the wind out of DOL's sails anyway. (I know that there is room for the DOL to challenge the methodology, but assume for present purposes that the correction you chose would pass muster with a majority of little old lady ERISA lawyers--i.e., its conservative, results in some financial pain for the fiduciary, and 4 out of 5 dentists would say that it makes the plan participants whole.)

If there is no "settlement" with DOL, the 20% penalty is not going to be applicable for a self-corrected issue. I have successfully defended a fiduciary breach charge by DOL by fully (says me) correcting the problems it identified before there were any negotiations or agreements between the fiduciary and DOL. The DOL tried to assess the 20% penalty anyway, but I backed them down on that. Admittedly, the issues were pretty straightforward and the appropriate correction methodology was obvious, but still, the fiduciary wouldn't have gained any protection from participant lawsuits if it had chosen to use VFCP instead of self-correcting (not that there would've been any traction there anyway since all participants were made whole). We just would've run up some more fees and gotten a nice letter to put in the file.

I know that VFCP allows you to dodge excise taxes for late 401(k) contributions, and I am sympathetic to the philosophy behind the program. Nevertheless, in doing a cost/benefit analysis for your plain vanilla sorts of fiduciary boo-boos, VFCP doesn't add up, IMHO.

Does anyone out there have any wonderful tales about VFCP? I don't want to unfairly malign the program, and I do offer it up as an option in appropriate circumstances. If the main benefit of the program is that it generates another piece of paper for the files and therefore helps the fiduciary sleep better at night, maybe it's worthwhile. Otherwise, if the marginal protection a DOL no-action letter provides is often outweighed by the cost and hassle of getting the thing, it is a harder sell to the fiduciary.

[Kirk Maldonado]

erisafried:

You espoused my sentiments exactly.

[Alf]

Great title for your post - it sums up the analysis well. We don't send letters out to participants notifying them of a fiduciary breach regardless of whether the DOL is on board with us or not.