Best Practices: Limiting Recordkeepers’ Liability

A workshop session on the first afternoon of this year’s ASPPA Annual conference looked at recent trends and best practices for recordkeepers regarding service agreements, use of plan- and participant-specific data and more.

Speaker Richard A. Morgan, JD, MBA, of Schwab Retirement Plan Services, Inc. noted that his firm is finding that more consultants and plan sponsors are asking for the Plan Committee to be listed as a party to the service agreement. If that approach is taken, he suggested, it raises several questions. Recordkeepers should determine what contractual representations, acknowledgments and/or obligations should be obtained from the employer and from the Plan Committee, both separately and jointly. “If there is a contract breach by a plan sponsor client, would you prefer to seek indemnification from the employer or from a member of the Committee?” he asked.

The indemnification provisions of its service agreement ane of the primary ways of limiting a recordkeeper’s liability, Morgan noted. Indemnification creates a contractual obligation for one party to cover costs incurred by the other party, such as legal expenses in the event you are sued.

Thus, he said, it is important to both:

• identify who is responsible for completing a specific function; and
• identify functions you are not responsible for performing – most commonly, Morgan said, responsibility for errors made by predecessor recordkeepers.

In particular, Morgan advised, “with the heightened scrutiny surrounding lost and missing participants, remember to document in your service agreements what functions you are or are not performing with respect to participant searches.”

Service Guarantees

Morgan noted that plan sponsors and consultants are increasingly asking for service guarantees to be added to their recordkeeping agreements. These service guarantees usually include:

• identification of a standard;
• identification of the expectation; and
• the risk exposure if the standard is not met.

Attendees at the session provided examples of service guarantees they have encountered, including fraudulent activity that results in a benefit being paid and emails to participants who leave the plan.

Employer Direction

Be sure to include a provision permitting you to rely on employer direction. Morgan advised, identifying this as “a huge issue.” He suggested incorporating language in the service agreement like this one:

“Record keeper and/or its affiliates is authorized to rely and act upon information, data, instructions, and/or directions timely provided and received by Record keeper and/or its affiliates that Record keeper and/or its affiliates reasonably believes to be given by authorized individuals of the Employer or a party on behalf of the Employer in an approved format. Record keeper will consider all such information to have been reviewed and certified as correct by Employer.”

Caps and Baskets

Morgan suggested some other ways to contractually limit liability exposure, starting with “caps” and “baskets”:

• Caps: parties agree to a cap on damages under an indemnification claim, such as $500.
• Baskets: parties agree to a threshold amount of losses that must be incurred by a non-breaching party before such party can seek damages under an indemnification claim.

Benchmarking

Morgan also noted that Schwab is seeing an increase in requests for “benchmark” provisions within recordkeeping agreements. More plan sponsor clients are asking for benchmarking services – and not just for fee comparison purposes, he said, noting that clients increasingly are asking how their plan provisions, including employee participation, employer match, participant saving rates and distribution options, compare to employers of similar size, in similar industries, located in similar regions, etc.

Heightened Scrutiny on How Recordkeepers Use Plan and Participant Data

Noting that the use of plan and participant data is an emerging issue in litigation, Morgan cited a series of ERISA-related lawsuit settlements, including two involving John Hopkins University and Vanderbilt University that included the plans' recordkeepers:

• Johns Hopkins as part of their settlement agreed that its recordkeeper can’t “solicit current plan participant for the purpose of cross selling proprietary non-plan products.”
• Similarly, in settling its case Vanderbilt agreed to instruct their recordkeeper not to use participant data to sell products unrelated to their plan.

“Consider working with your ERISA counsel and reviewing contractual language surrounding use of plan and participant data," he advised.