large pencil erasing part of a drawing of a person's brain (Photo: Shutterstock)

What fiduciary responsibilities do plan sponsors, advisors and recordkeepers have to plan participants that show signs of cognitive decline, and what can they do to protect those individuals from fraud? The answers aren’t clearly defined, but the industry can take steps to identify red flags that could signal changes in a participant’s cognitive function and take reasonable steps to address the situation.

The issue is of particular concern for elderly individuals, although the industry should be aware that participants of any age could be impacted by decreased mental capabilities.

Expected to increase

The Advisory Council on Employee Welfare and Pension Benefit Plans produced a report based on testimony and research from experts in the industry. It delivered the report, titled  “Considerations for Recognizing and Addressing Participants with Diminished Capacity,” to the Department of Labor in December.

Overall, the report found that the issue of cognitive decline is emerging but expected to increase as the elderly population grows. According to the U.S. Census, 16.5 percent of Americans were over the age of 65 in 2019, and that percentage is expected to increase to 44 percent by 2040. Individuals between the ages of 85 and 99 years are expected to more than double during that time frame.

Many of these people are retired but still attached to an employer-sponsored retirement plan. Without regular contact with plan sponsors, advisors and recordkeepers, these individuals may more easily fall through the cracks if their cognitive abilities decline, leaving them vulnerable to fraud and exploitation.

Industry unsure of fiduciary responsibility

While some members of the ERISA community are making excellent efforts to address the issue, the industry is largely unsure of its fiduciary responsibilities in cases of potential cognitive decline, and well-defined procedures to identify and address impairment are lacking, according to the report.

A representative from the Retirement Research Center of the Defined Contribution Institutional Investment Association (DCIIA), which surveyed plan sponsors about the topic, testified that the majority of plan sponsors do not know how prevalent cognitive decline is among their participants, and half of those surveyed considered cognitive decline a low-priority issue. When asked what they would do if they encountered a participant suffering from cognitive decline, about half said they would refer the case to legal counsel and half said they would investigate further.

About 25 percent of plan sponsors surveyed said they believe they have a fiduciary responsibility to separated or retired employees exhibiting cognitive decline, while 25 percent do not feel they have a fiduciary responsibility, and half don’t know.

If diminished cognitive ability does become a fiduciary responsibility, many plan sponsors indicated they might encourage separated and retired participants to move their balances, according to the survey.

DOL guidance could be helpful

The American Benefits Council also conducted a survey of large multi-state employers and found about one-third have encountered cases of diminished capacity, although two-thirds indicated they do not have procedures set up to interact with such individuals. Both sets of respondents thought DOL guidance would be helpful, including identifying steps to address affected individuals, supporting the use of trusted contacts and providing educational training. Liability relief was also mentioned as a useful tool because it could insulate plan sponsors if they temporarily hold questionable transactions.

Registered Investment Advisors (RIAs) and consultants surveyed by the Retirement Research Center were generally not aware of specific incidences of cognitive decline among their clients’ plan participants and noted that they do not normally interact directly with participants. Clients are not asking for advice about issues related to cognitive declines, nor are they seeking capabilities or practices to address it. However, RIAs did note a trend toward participants remaining in employer plans post-retirement as well as participants working longer than expected, indicating diminished capacity could become a more prevalent concern in the future.

Testimony by recordkeepers unveiled a wide variety of policies that address diminished capacity, ranging from doing nothing to having a dedicated team focused on the issue. Some recordkeepers indicated they are required to process transactions if the participant is properly identified and validated regardless of the wisdom of the transaction. However, some recordkeepers have detailed plans in place to identify and investigate questionable transactions.

Red flags

Red flags outlined by various witnesses who testified for the report included confusion about simple tasks; changes in participant behavior, investment strategy or trading strategy; changes to beneficiaries or adding authorized individuals; and unexpected withdrawals and transfers. Among the recommendations identified by witnesses to deal with suspected cognitive decline are escalating suspicions, investigating suspicious transactions, establishing and contacting trusted contacts or powers of attorney, consulting with Adult Protective Services and law enforcement, and holding withdrawals while research is conducted.

In response to the testimony, the council provided three recommendations to DOL to address cognitive decline, including providing education to the general public about the topic of diminished mental capacity and the potential risk of financial exploitation; providing education for fiduciaries, plan sponsors, recordkeepers and plan service providers with best practices and steps to identify and address individuals with signs of diminished capacity; and providing guidance for voluntary policies that impose reasonable temporary restrictions on participant plan actions and encouraging participants to identify trusted contacts or a power of attorney.

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.