401k Fiduciary Lawsuit Highlights Fee Benchmarking
401k Fiduciary Lawsuit concerns are driving behavior and practices among Retirement Plan Committees. Fiduciary responsibility is something employers should be hyper-vigilant about since we are noticing more 401k Fiduciary Lawsuits. Plan sponsors are facing 401k fiduciary lawsuits that call into question whether or not they fiduciaries have sufficiently fulfilled their fiduciary duty to the plan and its participants. The outcomes of those 401k fiduciary court cases have been mixed, but a decent number of the rulings have come out in favor of the plaintiffs, who are usually a participant or group of participants who have brought a case against the plan sponsor and, sometimes, the plan’s service provider(s). Many of these 401k fiduciary lawsuits have focused on fees — their “reasonableness,” their necessity, and whether the fees are being assessed for funds and services add value and help participants achieve their retirement goals.
The headline of a recent article in the Valdosta DailyTimes, a local newspaper in Georgia, asked an all-important question: “How’s your 401k plan?” The author, Mr. Kent Patrick of Bush Wealth Management, aptly points out that it’s a question plan sponsors don’t ask enough. Moreover, he asks: Is your 401k plan as good as it could be? That’s a heady question. Let’s step back and start with: How often do you check up on your retirement plan and fees? Many experts agree at least annually is ideal.
Here’s one major reason why it matters: Mr. Patrick points to two landmark rulings from the historic Tibble v. Edison International 401k fiduciary court case. One was from the Supreme Court in 2015; the other from the U.S. District Court for the Central District of California in 2017. You can read the details of the cases in the article linked above, but basically, the outcome was that Edison International, the plan sponsor, had committed a breach of fiduciary duty by selecting higher-priced mutual funds for its investment menu when equivalent, lower-cost ones were available. In addition, the Supreme Court ruled that, under the Employee Retirement Income Security Act (ERISA), the law that governs retirement plans, a plaintiff can initiate a claim for violation of fiduciary duty by a plan sponsor “within six years of the breach of an ongoing duty of prudence in investment selection.”
Investment committees need to be aware of their fiduciary duties and remain vigilant in carrying them out. As Mr. Patrick also notes, retirement plan committees have as much fiduciary responsibility for selecting plan investments and monitoring their fees as a third-party advisor. Yes, benchmarking investments and monitoring costs is time-consuming. But guess what? So is dealing with a multi-year-long 401k fiduciary lawsuit when participants bring suit for a breach of those duties. And the litigation process is a lot costlier, also.
Mr. Patrick implores plan sponsors and retirement plan investment committees to ask themselves: Are your plan investment fees reasonable? And by the way, he also notes that employees can look up this information on their own — there are websites out there where they can easily find out what’s considered reasonable and what isn’t when it comes to plan fees.
Here’s something else to check: Are you using institutional share classes in your investment lineup? Why should this matter? In the court case Tibble v. Edison, it was found that the investment committee selected retail shares rather than institutional shares. Institutional shares typically cost less than retail shares. It may only be a few basis points, but those seemingly small differences make a huge impact when it comes your participants’ ability to build wealth for retirement over time. The lower the fees they pay today, the more of their savings they can put to work for their future.
If it’s been a while since you’ve undertaken any benchmarking exercises, now, is as good a time as any to get your retirement plan committee together to review the plan’s investment lineup and fees. Make certain plan fees are reasonable and necessary, and that participants’ best interests are represented first and foremost. Your employees rely on their workplace retirement plan to help them build wealth and financial security for their future. As a plan fiduciary, it’s your responsibility to help them achieve those goals. Taking some time to evaluate the plan’s investment menu and fees, and adjusting as necessary, is the best way to avoid a 401k fiduciary lawsuit, and help your participants live well in retirement.