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401k Lawsuit Demonstrates the Need for Solid Documentation

401k Lawsuit Demonstrates the Need for Solid Documentation. Lawsuits around the handling of 401k plan assets have become almost commonplace for plan sponsors, plan providers and plan fiduciaries.  Every plan provider and plan sponsor is aware they may become a party to a future fiduciary lawsuit. They know there is always a chance.  Although 401k Plan lawsuits surface in many forms and sizes, a settlement does not necessarily indicate guilt or innocence, yet settling can be an effective strategy for limiting losses.  The most recent large fiduciary lawsuit targeting plan sponsor fiduciaries was a $41 Million case focused on the plan fiduciaries of a $3 Billion plan.  The fiduciaries were charged with the irresponsible use of a Money Market fund as a plan participant investment option.  In such a case the quality of the corresponding documentation within committee meeting minutes and the plan’s Statement of Investment Policy are key to the defense.  Proper documentation in the form of meeting minutes of a retirement committee’s actions goes a long way toward supporting plan fiduciary actions and exercising prudence.

Appropriate actions taken by the retirement plan committee can be supported by proper documentation.  However, the same appropriate actions taken by a plan committee can become difficult to defend in the absence of proper documentation.

In this recent case, the absence of appropriate documentation and the extended use of a Money Market Fund created unnecessary risk for the retirement plan committee.   The suit references “the imprudent use of a money market mutual fund,” being offered in the plan, while contrasting the returns of the money market fund with the returns of stable value funds during the same time series.  The argument then becomes that the plan fiduciaries acted imprudently by offering plan participants a money market fund.  That is not necessarily the case. However, without the appropriate meeting minutes documenting, the alternative investments considered and exactly why the retirement plan committee chose to retain the money market investment option, plan fiduciaries will spend their time fighting such lawsuits.  In the absence of suitable documentation, plaintiffs merely compare and contrast Stable Value Returns with Money Market Fund Returns – to make a strong case that participant deferrals were not prudently overseen or managed.

The Retirement Committee would have been well served, in this case, to document via committee meeting minutes that at least on an annual basis, the retirement committee considered and reviewed various Stable Value Funds.  However, upon reviewing such alternative investments, the return, the risk and the lack of liquidity, the retirement committee decided against using the stable value asset class.

The Investment Policy Statement, and meeting minutes is where a retirement plan committee does their best work in mitigating risk of future lawsuits. Plan sponsors are well served to have knowledgeable committee members or strong ERISA counsel review all committee minutes before the minutes are approved and memorialized.


Steff Chalk

Steff Chalk

Managing Editor at 401kTV
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.
Steff Chalk

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