NEW YORK — Inadvertent fiduciary lapses and other operational problems pose the real legal threat to most defined benefit and defined contribution plans rather than headline scandals like Enron, according to an informal analysis of more than 200 retirement plans by Mercer Human Resource Consulting.
"Many of our clients believe that fiduciary risks are just a problem when there's a bad actor involved in fraud or misconduct, but what we found in our analysis is that this often applies to people with the best of intentions," said Barry Peters, a Mercer consultant on legal issues who is on the company's national steering committee on governance issues.
The analysis examined three separate areas of fiduciary responsibilities — operational, governance and investment. The operational review indicates that as many as 90% of the defined benefit plans had errors in calculating vesting, while 70% had miscalculations in benefits. Among defined contribution plans, 85% failed to correctly determine eligibility and contributions, according to the analysis, which was based on data gathered from more than 200 compliance audits "roughly divided equally between DC and DB plans" conducted by Mercer over the past 10 years. Although most errors centered on calculation problems, there were other issues such as failure to deposit employee contributions in a timely fashion.
The second analysis involved 30 governance reviews (taken from among the 200) spanning a cross-section of clients with DC and DB plans with assets ranging from several hundred million to billions of dollars. The review found that 28 of the 30 plan sponsors had no up-to-date governance committee charter and 27 of them suffered from deficiencies in committee processes. There were inconsistencies of plan documents and practices in 25 plans. Among one of the more troubling issues, Mr. Peters said, is the gray area where company officials are "uncertain when to wear the fiduciary hat and when to wear the employer hat." As a result, fiduciaries can be personably liable if their decisions are not in the plan participants' best interest.
"Many have the foresight to determine what they can do to avoid the worst of headlines," Mr. Peters said. "They've got a set of problems and they're trying to do a good job, but they're bewildered by the issues and challenges."