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10 tips for protecting retirement plans from litigation.

With more and more wealth being concentrated in retirement plans, employers and plan fiduciaries are increasingly finding themselves the target of litigation. While employers may not be able to make their plans totally litigation proof, here are 10 measures that will help to make plans less of a target and/or more likely to prevail in the event of litigation.

1. Rid the plan of unnecessary plan directives. Failure to adhere to directives in the plan not required by the Internal Revenue Code or Employee Retirement Income Security Act (ERISA)--such as a requirement that fiduciaries notify employees within a certain number of days of their eligibility to participate--have been used by Internal Revenue Service (IRS) and Department of Labor (DOL) personnel, as well as by participants, as a basis for the payment of fines and/or to sustain litigation.

2. Reconsider long-term restrictions that prevent diversification out of company stock. Such restrictions invite litigation when the stock does poorly and negate the fiduciary's defense that the participant selected the investment and is therefore solely responsible.

3. Draft clear provisions governing who is covered by the plan and who is not. Large plans have the luxury of being able to exclude categories of workers from plan participation so long as the plan can still satisfy the code's minimum coverage and nondiscrimination rules.

Exclusionary categories must be drafted carefully, however, and in a way that cannot be altered by external determinations. For example, an exclusionary category of "independent contractors" leaves the plan vulnerable should a court or governmental agency conclude that such individuals are actually employees. Better to exclude as a category those individuals who are treated on the books and records of the company as independent contractors without regard to any external reclassification.

4. Give sufficient discretion to the plan fiduciary to decide claims. By drafting the plan to include sufficient discretion to the fiduciary to make such decisions, the plan ensures that if a participant decides to litigate a denied benefit, the plan fiduciary's decision will be overturned by the court only if it was arbitrary and capricious--a relatively low hurdle for the plan to meet. Inclusion of satisfactory discretionary language can often be the difference between a participant deciding to file suit or not.

5. Specifically and expressly reserve the right to eliminate or modify health benefits, even after participant retirement. This provision should be in both the plan and the summary plan description.

6. Reserve the right to terminate the plan without imposing conditions or equivocations. This applies to matters such as a limiting phrase promising that the plan will be terminated "when necessary."

7. Make sure the plan allows plan fiduciary rights. If plan fiduciaries wants to reserve the right to impose market-timing restrictions, make sure that the plan specifically allows it and disclosure is made to participants.

8. Reserve the right to delegate ministerial duties to non-fiduciaries.

9. Specify plan administrative expenses for individual participants. If certain plan administrative expenses will be allocated to an individual participant's account (rather than to all accounts pro rata), specify this in the plan.

10. Consider adopting a plan-imposed limitations period. This is a particularly prudent step in health plans. Except for fiduciary breaches, ERISA does not impose a statute of limitations.

Thus, when a non-fiduciary claim arises, such as a benefit denial, courts impose the most analogous state statute of limitations. This can result in an extremely long limitations period.

For example, in the case of a benefits denial, it is not unusual for the state statute of limitations to be as long as 10 years. Courts of appeals in at least three circuits have upheld health plan provisions that instead imposed their own, much shorter limitations period.

Pamela Perdue is Of Counsel to the St. Louis-based law firm of Summers, Compton, Wells & Hamburg and author of Qualified Pension and Profit Sharing, published by Warren Gorham & Lamont. She can be reached at
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Title Annotation:benefits
Author:Perdue, Pamela D.
Publication:Financial Executive
Geographic Code:1USA
Date:Jan 1, 2005
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