Dodge Distractions During Economic Distress
COVID-19 is wreaking havoc on our economy. Customers have vanished, supply lines have evaporated, employees are working from home and volatility reigns in securities markets. C-suite executives, who also find themselves working remotely, are being pulled in multiple directions.
Among the hardest-hit industries are retail, oil & gas, hospitality and travel. Already, J.Crew and Neiman Marcus are reorganizing under Chapter 11. No doubt, many others will follow.
As C-suite executives hammer out deals with creditors and develop post-bankruptcy business plans, they ignore the retirement plans at their peril. The unprecedented volatility afflicting most all asset classes challenges many long-held assumptions and industry norms. The onerous task of internally overseeing these retirement plans diverts managerial energy and resources from the vital task of executing revised business strategies. At this moment, the plans largely serve as a distraction from the task at hand: survival.
Executives, however, are not shackled to these distractions. ERISA neither requires, nor mandates, that plan sponsors manage or engage in continuous oversight of their plans. In fact, ERISA allows for enormous flexibility in the management and oversight of retirement plans. There is no requirement in ERISA that corporations or committees of a corporation, serve as the fiduciaries of their plan. So, why does the current model of retirement plan management continue to embroil corporate managers?
While it’s true that ERISA allows for great flexibility, it is nonetheless also true that ERISA is a demanding task master. Hundreds of pages of regulations and 40 years of case law call for and require heightened expertise and compliance. While government enforcement lies with the Department of Labor (DOL), an active plaintiff’s bar continually scans the horizon looking for lucrative class action lawsuits. These lawyers are sophisticated and diligent. They are also fiercely determined.
A clean and elegant solution lies close at hand. Corporate managers can easily remove the retirement plan albatross from around their necks.
Plans can simply delegate fiduciary responsibility to an independent fiduciary firm. Professional fiduciaries whose core competency and expertise lies in the oversight and management of qualified retirement plans will exercise best fiduciary practices, thereby assuring compliance with ERISA. In the context of a Chapter 11 reorganization (or in the pre-petition planning stages) there is no justification for C-Suite executives to retain either these responsibilities, or the potential exposure to personal liability associated with serving as an ERISA fiduciary.
This solution is not to be confused with the suggestion that certain corporate functions be merely “outsourced.” Property management, information technology, and various accounting functions can be performed by others in exchange for a fee, and corporate management can rely on this. However, the designation as a fiduciary is a delegated responsibility which carries with it certain statutory obligations imposed by ERISA. A fiduciary has discretion to exercise authority over a plan and is charged with a duty of loyalty to the plan participants, effectively precluding the fiduciary from engaging in acts of self-dealing or conflicts of interest. Importantly, fiduciaries must act as prudent experts and failure to meet these fiduciary standards can result in personal liability. No “outsourced” function carries this weight of responsibility and personal exposure to liability.
All of this brings us to the fundamental question: Why take the risks inherent in this widely accepted, old school, model of retirement plan management and oversight? This model has been broken for decades. It doesn’t serve plan sponsors, and it doesn’t serve plan participants. A new model of delegating plan oversight, management, responsibility and risk, to an independent fiduciary, benefits everyone involved.
A global crisis that threatens the future of many corporations demands an innovative response. An attitude of “but, we have never done that before” is simply a luxury of the past which can no longer be indulged. Every professional hour devoted to retirement plan oversight, is one less hour devoted to executing corporate strategy.