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Litigation Nation: How to Avoid the Danger Zones


‘I don’t know if you’ve been watching the news lately, but we live in contentious times,’ said [anyone at any given moment in history]. It seems to be the case that putting people near each other is the fastest way to guarantee discord of some kind. In our industry, that can play out in a number of ways; making major headlines these days, though, are lawsuits targeting 401(k) plans.

For the last decade, most of these lawsuits have been aimed at mega plans – those in the multibillion-dollar arena – and their service providers. But the past few years have seen this litigation creep down market and target plan sponsors for their lack of fiduciary prudence. So the question must be asked: as a plan sponsor, do you know how to help reduce the threat of litigation?

First, remember the point of the 401(k) plan is to help employees achieve desired retirement outcomes. In other words, your legal obligation is to ensure your plan’s administration and investment management decisions are in the best interest of the participants. Keeping that in mind, it’s useful to understand potential danger zones.

Inappropriate investment choices – ERISA puts the emphasis on a prudent decision-making and monitoring process in the selection of investments, rather than on the specific funds chosen. Creating an investment policy statement (IPS) is the best way to establish guidelines for making investment-related decisions in a prudent manner, but plan sponsors must be diligent in following its criteria and objectives. Once established, failure to follow an adopted IPS could be considered a demonstration of fiduciary imprudence.

Excessive fees – Again, ERISA requires a careful, prudent process to ensure no more than reasonable fees are paid for necessary services. High fees aren’t inherently bad, but they can become legally problematic if a plan sponsor can’t demonstrate their prudent decision-making. Understanding if fees are reasonable requires a thorough benchmarking process – fund fees should be compared to other funds with similar risk/return and asset class characteristics, and plan fees (recordkeeping, administration, advising, and any other recurring expenses) should be compared to peer plans.

Documentation is an important element here – formally demonstrate the process undertaken to select and regularly monitor investments, review fees charged and services received, and choose which benchmarks were used. Continue to monitor fees over time and consider how changes in the plan have affected those fees. (For example, as plan assets grow over time, the plan may become eligible for a lower cost share class.)

Committee members who both understand and properly execute their fiduciary roles and responsibilities are better equipped to serve their plan participants and avoid litigation. That’s a winning formula for everyone (except the litigation lawyers, I guess).

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