10 tips for protecting retirement plans from litigation.

• Author: Perdue, Pamela D.
• Position: Benefits

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...