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An Overview From the DOL

The Labor Department outlines the Y2K deal and potential liabilities.

September 1, 1999
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This memorandum restates the general guidance issued to Pension and Welfare Benefits Administration's regional and district offices to assist investigators in evaluating the potential fiduciary liability arising from the effect of the year 2000 computer problem on the operation of employee benefit plans. This guidance does not represent an advisory opinion or other interpretation of ERISA by PWBA, nor is it intended to establish or identify specific requirements for plan fiduciaries in connection with the execution of fiduciary responsibilities other than those currently existing under ERISA. Although the sample questions contained in the attachment were distributed to the regional and district offices to assist field-office staff in conducting year 2000 reviews, actual information requested by field investigators will vary from case to case as determined pursuant to the investigative discretion of the PWBA field office management and staff.

I. INTRODUCTION
Commonly referred to as the "Year 2000" or "Y2K" problem, this issue arises when a computer performing a date-dependent computation or operation produces erroneous results because the system recognizes years only by the last two digits, causing a "00" entry to be read as the year "1900" rather than the year "2000." Like most business operations, employee benefit plans rely on computers to perform critical operations such as benefit calculations and payments. In this regard, plans rely on their own internal computer systems as well as those of service providers, such as banks, insurance companies, actuarial firms and investment management companies. Because the Y2K problem could have a substantial impact on the plan's investments, plan fiduciaries must consider that impact in making investment decisions on behalf of the plan and in monitoring the investment decisions of other fiduciaries. If their service providers, and the entities in which the plans invest fail to adequately address the Y2K problem in their computer systems, the plans' interests may be adversely affected if those systems subsequently malfunction on or after January 1, 2000.

PWBA is committed to conducting Y2K reviews in a manner that appropriately reflects the significance of this issue for employee benefit plans covered by ERISA. Accordingly, PWBA has addressed the Year 2000 problem as it relates to employee benefit plans through public outreach efforts that have included: (a) PWBA officials discussing the Year 2000 issue in the course of public speeches; (b) issuance of two press releases (February 9, 1998 and July 23, 1998) warning plan fiduciaries of their obligation and potential liability under ERISA; and (c) the July 23, 1998, publication on PWBA's Web page of informal guidance in the form of questions and answers ("Q&As") addressing the Y2K problem and its potential impact on employee benefit plans. In addition, a general directive has been issued to all PWBA regional and district offices to conduct Y2K reviews in the course of all new and ongoing civil investigations.

II. EVALUATING FIDUCIARY LIABILITY
As a general matter, the issue of whether a plan fiduciary has taken appropriate action to protect the interests of the plan, its participants and beneficiaries requires the application of ERISA, which includes an evaluation of procedural prudence. As indicated in the Q&As issued on PWBA's Web page on July 23, 1998, the protection of plans and their participants and beneficiaries includes the establishment and implementation of a prudent procedure for ensuring that the plans' own computers, and, to the extent possible, those of the plans' service providers, are Y2K compliant. Likewise, when making, evaluating, or monitoring investment decisions, plan fiduciaries must take prudent measures to protect the plan from the potential adverse effect of the Y2K problem on plan asset investments. The standard for evaluating a prudent procedure in the Y2K context is similar to that used in other matters involving ERISA-covered plans and their operations.

Evaluating whether a plan fiduciary has implemented a prudent procedure to protect the plan's interests requires the application of ERISA's fiduciary responsibility provisions. In developing a prudent process the plan fiduciary should evaluate, as appropriate, the year 2000 compliance of: (a) the plan's own computer system; (b) the plan sponsor's computer system; (c) the plan's service provider's computer system; and (d) the computer systems relating to the plan's investments. In addition, it is expected that a plan fiduciary will establish and implement a contingency plan designed to protect the interests of the plan and its participants and beneficiaries in the event a Y2K problem arises in any of these areas.

  1. The Plan's Own Computer System
    If a plan operates its own computer system, the plan fiduciary must determine whether that system, and its interface with other computer systems, are Y2K compliant. Although plan fiduciaries are responsible for making this determination, in general, it is not expected that fiduciaries will actually perform the technical tasks necessary to evaluate, correct, and test the plan's computer system. In fact, if a plan fiduciary performs such tasks but lacks the technical expertise necessary to protect the interests of the plan and its participants and beneficiaries, such actions could be deemed imprudent and thereby constitute a fiduciary breach.

    In addressing the Y2K issue with respect to a particular computer system the plan fiduciary may decide it is appropriate under the circumstances to obtain the services of an expert to perform certain technical functions. Such functions may include the inventory, review, assessment, conversion, and testing of the computer systems relating to the plan. In some cases the plan fiduciary may decide to replace the computer system. In deciding how best to address the Y2K issue, the fiduciary is subject to the same standards applicable to other matters relating to the operation of the plan. In addition, the plan fiduciary's selection and retention of a Y2K expert are subject to the same fiduciary considerations as the selection and retention of other plan service providers.

  2. Plan Sponsors' Systems
    Where applicable, the plan fiduciary has an obligation to consider the Y2K compliance of the plan sponsor's computer system. For example, if a plan relies on participant data provided by the plan's sponsor to calculate benefits, a Y2K problem in the sponsor's computer system could have an adverse impact on the plan's ability to make benefit payments to participants. Because a Y2K problem involving a plan sponsor's computer system could have an adverse impact on the plan, plan fiduciaries have an obligation to determine how best to address this issue. Accordingly, a plan fiduciary is responsible for obtaining appropriate information in a timely fashion from the plan's sponsor for the purpose of evaluating the Y2K compliance of the sponsor's computer system.
  3. The Plan Service Providers' Systems
    In addition to addressing the Y2K problem as it relates to the plan's and plan sponsor's computer systems, plan fiduciaries have an obligation to determine whether the plan's critical operations will be endangered by the computer systems of unrelated service providers. Such service providers may include third party administrators, financial institutions, or health care administrators or providers, to name just a few. In some cases, such as financial institutions, the service providers may be subject to the regulation of other governmental or independent agencies that have established standards for Y2K compliance or disclosure. In other cases, however, the plan service provider may be largely unregulated with respect to the Y2K problem.

    Regardless of the extent to which service providers are regulated, plan fiduciaries are responsible for obtaining appropriate information in a timely fashion to evaluate the Y2K compliance of all of the plan's service providers and to determine what action is appropriate to ensure that the interests of the plan and its participants and beneficiaries are protected. In addition, Y2K compliance is another factor to be considered by plan fiduciaries when selecting service providers. The plan fiduciary is also responsible for monitoring the service provider's operations to ensure ongoing compliance and protection of the plan's interests.

  4. Plan Investment Issues
    In general, plan assets are invested either by a plan trustee or that authority and discretion is delegated to an investment manager. In those cases where an investment manager has been appointed, the plan trustee has an ongoing responsibility to monitor the operations of the investment manager to ensure compliance with ERISA. Accordingly, regardless of how investment discretion and authority have been allocated, the responsible fiduciary has an obligation to consider Y2K compliance in making investment decisions. In this regard, the fiduciary must obtain appropriate information to make the decision and evaluate the investment. In those cases where participants make investment decisions relating to their individual accounts, the plan fiduciary is responsible for ensuring that the participants timely receive, or have appropriate access to, information necessary to make investment decisions in the Y2K context.
  5. Contingency Plans
    Because of the pervasive nature of the Y2K problem, it may not be possible to prevent a disruption of computer operations. In recognition of that possibility, a plan fiduciary must determine how best to protect the plan and its participants and beneficiaries through the establishment of a contingency plan that will be implemented in the event the plan's essential operations are affected. Such a contingency plan should address possible courses of action appropriate under various scenarios in the event Y2K problems arise in connection with computer systems operated by the plan, its service provider(s) or the plan sponsor(s).
III. ADDRESSING ERISA VIOLATIONS
The guidance issued to PWBA's field offices states that Y2K reviews will be conducted in all new and ongoing civil investigations. The attached list of sample fiduciary questions was provided to the field offices to assist the staff in the initial stages of conducting those reviews. In addition, the guidance provides that a Y2K warning will be issued in those cases where a determination is made that a plan fiduciary has failed to take appropriate measures to protect the interests of the plan and its participants and beneficiaries from the potential harm posed by the Y2K problem. The issuance of a warning is intended to place the plan fiduciary on notice of his or her obligation and to encourage voluntary compliance in addressing the Y2K issue. Regardless of whether a warning is received by an individual fiduciary, however, in those cases where plan fiduciaries fail to act prudently in performing their plan duties and plan participants and beneficiaries are adversely affected, appropriate enforcement action may be pursued.

SOURCE: U.S. Department of Labor, Pension and Welfare Benefits Administration, Washington D.C.

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