AICPA Insurance Programs

Edward J. Krill and Kevin M. Murphy*

 

Many accounting firms have ventured beyond their traditional role as plan auditor and have assumed a variety of new responsibilities as service providers for pension and retirement plans.  This article identifies some of the major responsibilities and risks to accounting firms in regard to non-attest services for pension and retirement plans, and discusses recommendations to minimize this potential liability.  Limiting liability with respect to plan administration services is especially important in today’s volatile market, and in the wake of the Supreme Court’s recent decision that expands potential liability for errors in plan administration.  In LaRue v. DeWolff, Boburg & Assoc.,128 Sup. Ct. 120 (2008), the Supreme Court held that a plan administrator could be sued by individual plan participants for mismanagement, such as failing to timely execute a buy or sell order, reversing a decades old position of federal courts that barred individual participant claims.  

 

While LaRue did not address the question of liability of a service provider to an individual plan participant, other case law provides some indication of an accountant’s potential exposure to claims by participants, as well as by the plan sponsor or administrator.  The primary risk for claims by participants is upon plan “fiduciaries” such as the plan sponsor or plan administrator.  However, plan service providers also face potential risks, especially where they become aware of prohibited acts being performed by the fiduciaries, or where their services place them in a “control” position such that their actual function makes them a fiduciary. For example, if the service provider has the discretionary ability to transfer plan assets from one investment account to another or to make investments on behalf of a plan, regardless of whether or not the service provider actually undertakes these functions, a court would likely deem that the service provider is in a “control” position, and is therefore a “fiduciary”.

 

Non-Fiduciary Services

           

In accord with Regulations under ERISA published by the Department of Labor at 29 C.F.R. 2509.75-8, D-2, there are a number of activities that service providers to a plan may perform without becoming a fiduciary.  Individuals and firms that have no power to make decisions regarding plan policy, to interpret plan procedures, or to change plan practices, may perform certain administrative functions for an employee benefit plan without becoming a fiduciary.  Accounting firms that limit their services to these functions significantly reduce, but do not eliminate, their risk.  Examples of such non-fiduciary services are provided in these Regulations, including the:

 

1.         Application of plan rules to determine eligibility for participation.

2.         Calculation of service and compensation credits.

3.         Maintenance of participant service, contribution, investment and employment records.

4.         Preparation of reports such as Form 5500 required for submission to the Employee Benefit Plan Security Administration.

5.         Arithmetic calculation of benefits.

6.         Collection of employer contributions for deposit into plan accounts.

 

These Regulations describe the forgoing tasks as “purely ministerial functions” when performed within a framework of written policies, rules and procedures established by other persons who are fiduciaries.  The test of whether or not a service provider to a plan is a fiduciary is based completely on the actual function(s) performed without respect to titles, engagement letters, agreements, plan descriptions of responsibilities or any other document.  See, Lockheed Corporation v. Spink, 517 U.S. 882 (1996). Fiduciary status is a question of fact, determined by what the party actually did, not by formal titles or document descriptions. See Blatt v. Marshall & Lassman, 812 F.2d 810 (2nd Cir. 1987).

 

Liability of Non-Fiduciaries

 

The area of greatest exposure to liability occurs when a service provider crosses the line and becomes a “fiduciary” under ERISA §3(21)(A), by virtue of assuming a control or discretionary function, or by providing investment advice for a fee.   A fiduciary role brings with it strict statutory standards of conduct as well as potential liability for the actions of others associated with the plan, such as when a fiduciary learns or should have discovered improper plan administration by others. See ERISA §405(a).  However, even where a service provider remains merely a service provider and therefore a non-fiduciary, there are risks.

 

The Supreme Court has stated that there is no express provision in ERISA that imposes liability on plan service providers, who are not fiduciaries, for prohibited acts committed by the fiduciaries.  See Harris Trust & Sav. Bank v. Salomon Smith Barney, 530 U.S. 238 (2000).  However, Harris Trust interpreted the equitable relief provisions of ERISA as permitting liability on a non-fiduciary transferee of plan assets (a broker), and requiring it to return those assets to the plan, along with any profits and fees earned, if the transferee “knew or should have known” that the transfer was a prohibited transaction under ERISA.  In essence, the Court placed responsibility on non-fiduciaries for assisting in remedial action that is necessary to redress the consequences of actions of fiduciaries that violate ERISA.  The basis for this expansive reading of the equitable relief provisions of ERISA was found outside that statute.  In Harris Trust, the Supreme Court stated:

 

“The common law of trusts, which offers a ‘starting point for analysis (of ERISA)’…unless it is inconsistent with the language of the statute, its structure or purposes…plainly countenances assertive relief sought by petitioners against Salomon (a non-fiduciary) here… “, 530 U.S. at 250.

 

The pre-Harris view was expressed, for example by Freund v Marshall v. Ilsley Bank, 485 F. Supp. 629 (W.D. Wis. 1979) which held that where a non-fiduciary is aware of a breach, does not participate in it and is only engaged in ministerial duties with respect to the plan, a non-fiduciary in this situation could not be liable under ERISA. See also, Anoka Orthopaedic Associates v. Mutschler, 708 F.Supp. 1475 (D. Minn. 1989).  However, this view should provide little comfort in today’s post-Harris Trust legal environment.

 

In Harris Trust, the Supreme Court explained that, in addition to civil penalties imposed by the Department of Labor, ERISA provides for “appropriate equitable relief” against a non-fiduciary.  The Court’s discussion seemingly would eliminate claims for “damages”, as opposed to claims for restitution (e.g. return of assets, fees, or profits).  Further, the Court referenced the requirement that there must be proof of the non-fiduciary’s “knowing participation” in the fiduciary’s breach.  Despite these limitations expressed in Harris Trust, the Court did in fact expand the scope of potential liability of non-fiduciaries beyond what had been understood based on prior decisions of the Supreme Court and other federal courts.  While Harris Trust specifically addressed the liability of a transferee of plan assets in a prohibited transaction, the Court’s language would appear to permit equitable remedies to also be applied against other non-fiduciaries, such as service providers, if there is “knowing participation” by the service provider in the fiduciary’s breach.  What remains to be discussed below is what might constitute “knowing participation”.

 

                                              Non-Fiduciary Duties Upon Discovery of Plan Mismanagement

           

Harris Trust did not address whether or not innocent service providers have a legal duty under ERISA to act, if and when they learn of breaches or mismanagement by plan fiduciaries, after the fact.  It remains an unanswered question whether such after-the-fact discovery, followed by silence or inaction, would constitute “knowing participation” in the fiduciary’s breach.  Arguably, discovery after-the-fact and subsequent inaction by the non-fiduciary service provider should not be considered “knowing participation”.  However, given what seems to be steadily expanding interpretations of potential liability under ERISA (e.g. LaRue, Harris Trust, etc) for fiduciaries and non-fiduciaries alike, it is not hard to imagine circumstances under which some courts may view such after-the-fact discovery and inaction of a non-fiduciary as a basis for some form of liability, particularly under the “appropriate equitable relief” provisions discussed in Harris Trust. 

 

An administrative services provider such as an accounting firm with limited "ministerial" duties can become aware of possible or apparent fiduciary misconduct, such as self-dealing.  One option in this situation is to attempt to verify the facts by formal inquiry.  Doing nothing may or may not be acceptable for the non-fiduciary under the limited scope of the ERISA statutory framework, but there is much more to consider beyond ERISA. Ignoring ongoing plan mismanagement could be alleged by aggrieved parties to be “knowing participation” in the fiduciary’s breach, by reference to concepts such as accounting malpractice, a breach of the engagement contract, a violation of an applicable Code of Ethics or possibly a breach of express plan obligations. If a court were to agree, then the reasoning of Harris Trust may permit liability for “appropriate equitable relief”.

 

For CPA firms, AICPA Professional Standards do not address duties upon discovery of mismanagement by plan fiduciaries while preparing Form 5500 or performing administrative services. Such engagements are not designed to detect mismanagement by plan fiduciaries, nor are such engagements designed to or intended to create any duty to plan participants, as the client is the plan itself – not plan participants.  Additionally, the AICPA Statements on Standards for Tax Services and Treasury Department Circular No. 230 govern the preparation of Form 5500 by CPAs. To the extent information furnished to prepare the tax return appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of other facts known to the accountant, or if the CPAs become aware of inaccuracies in previously filed returns, the standards may impose additional obligations.

 

Thus a service provider needs to look beyond the obligations imposed by ERISA, as was done by the Supreme Court in Harris Trust.  In determining what to do, the accountant should consider obligations regarding client confidentiality and the parties to whom a duty is owed.  Courts have clearly stated that, under ERISA, a non-fiduciary service provider who learns of plan mismanagement does not have a duty to notify plan participants directly, but the service provider can (and one could argue, should) confront the plan fiduciaries and insist on corrective actions by the fiduciaries, depending on the circumstances. See, e.g. CSA 410(k) Plan v. Pension Professionals, Inc., 195 F.3d 1135 (9^th Cir. 1999)(the plan’s third party administrator noticed that employee elective deferrals were more than the deposits into the plan and took steps to remedy the situation directly with the plan fiduciaries).

 

Taking Steps to Correct Plan Mismanagement

 

Depending upon the unique circumstances of each case, such as the reliability of the evidence of mismanagement and whether the actions are in the past or ongoing, there are a variety of steps that an innocent party with duties toward a plan may consider. There is no authoritative source as to what is a “reasonable effort under the circumstances.”  For example, some, all, or none of the following steps could be considered:

 

a)      Seek confirmation of the facts from reliable sources.

b)      Provide written notice to the plan sponsor, administrator and trustees of the facts as known or the information that has been relayed.

c)      Request confirmation or denial, and if there is confirmation, insist upon documented remedial action.

d)      Evaluate whether notice to plan participants, other service providers or others should be made and by whom.

e)      Determine whether or not the accountant, as service provider, can or should participate in remedial steps.

f)        Consider withdrawal from the engagement.

                       

Consider an accounting firm that only prepares the plan’s Form 5500 and implements a pre-determined formula for plan contributions. If a firm employee learns of a potentially prohibited transaction by the plan administrator, such knowledge would not by itself convert the firm into a fiduciary. Accordingly, the firm would probably not be required to report that information to a governmental body, under ERISA provisions.  However, depending on the circumstances, the common law of negligence or related theories, combined with the standards of the AICPA or the American Society of Pension Professionals and Actuaries, and with reference to the Harris Trust case, could potentially form the basis of a claim for “appropriate equitable relief” by plan participants (applying an extension of the LaRue decision), unless reasonable steps to address the situation with the plan fiduciaries were taken by the accounting firm.

 

Careful internal documentation of the accounting firm’s response to information regarding plan mismanagement is essential, since inquiry into what an accounting firm did under these circumstances may not occur until years after the situation developed. Preparing such documentation at the direction of legal counsel will likely add a measure of protection to some of the documentation under various legal privilege doctrines. The advice of experienced counsel can also be of assistance in formulating a plan for the response and providing advice regarding the choices that will normally be present in this situation.

 

Advance Risk Management

 

While not all risky situations can be anticipated, there are steps that can be taken to potentially reduce the risks facing accountants who provide services to retirement plans.  Most of these steps relate to the formation of the engagement.  Suggestions for consideration include:

 

a)      Avoid fiduciary status and statutory liability for the acts of fiduciaries by describing and limiting services in the engagement letter to those that do not involve the discretionary management of or control over plan assets.

b)      Identify the fiduciaries in the engagement letter and make the distinction between “Plan Administrator”, which is normally a fiduciary, and “Third Party Administrator” which can be a non-fiduciary service provider.

c)      Better yet, use the term “Plan Service Provider” to describe the accounting firm’s role, when possible, instead of “Third Party Administrator;” and be certain that the 5500 identifies a fiduciary Plan Administrator.

d)      Have the engagement letter and work paper files reviewed on a periodic basis by a non-engagement partner to ensure that there has not been “engagement creep” into fiduciary duties.

e)      Maintain professional skepticism and be alert to the possibility of plan mismanagement by others, regardless of your exact role, and be prepared to consider taking steps should mismanagement or fraud be discovered.

 

* Mr. Krill and Mr. Murphy are members of the firm of Carr Maloney, P.C. in Washington, D.C.

 

This article is not intended as legal advice, because any legal advice would depend upon specific facts and circumstances.  Readers should seek specific advice before acting with regard to the subjects discussed herein.