401k Lawsuits Changing How Companies Should Manage their Plans

401k Lawsuits Changing the Benefits Landscape

401k lawsuitsWith the most recent 401k lawsuit filed against Franklin Templeton, a very large money manager, by one of the participants in their own 401k plan and the recent rash of lawsuits, it’s a good time to review the various types of cases that have been filed as well as practical and simple best practices outlined by a NYC based comp and benefits law firm.

What types of cases have been filed recently?

  1. Proprietary Funds – The Franklin case follows recent ones against American Century and NYLife as well as older cases against Ameriprise which questions whether a plan sponsor that also manages money should include their own funds in their DC plan and, if so, are fees reasonable.
  2. Stable Value – A class action case against Great West follows a settlement by MassMutual about whether the spread, or what a stable value earns and what they charge, is reasonable. With interest rates at historic lows making Money Market funds unattractive, more investors and plans are interested in stable value which has less risk than equities but more return than Money Market funds
  3. Excessive Fees
    1. Index v. Passive – Should plan sponsor be required to offer some or all lower cost index funds or ETFs alleged in the Franklin lawsuit?
    2. Revenue Sharing – Even some low cost index funds include revenue sharing to offset plan costs which might be high as alleged in the Chevron and Anthem suits filed against the plan sponsors and Vanguard.
    3. Small Plans – With the success of 401k lawsuits, more law firms are getting into the fray representing participants in smaller plans like the case against the $25 million Checksmart 401k plan which included the plan’s advisor as a defendant.
  4. Record Keeper as Fiduciary – In some 401k group annuity contracts, the record keeper has the ability to switch out funds which might make them a fiduciary especially under the expanded DOL definition opening up a whole new class of lawsuits.

What to do?

  1. Hire a Co-Fiduciary – Either a 3(21) fiduciary which recommends investments or a 3(38) which has complete discretion or a 3(16) which handles administration and operations.
  2. Don’t Set it and Forget It – Changes in the market as well as with the plan and the money manager make it imperative to have a documented, prudent investment process.
  3. Benchmark & RFP – All service providers should go through an annual benchmarking and regular RFP process which can be 3-5 years for the record keeper and 5-7 years for the plan’s advisors.
  4. IPS – Having an investment policy statement is not required but is recommended. The IPS is the guide to selecting and monitoring funds but worse than not having one is not following the one in place,

Fiduciary Liability Insurance – Different than the required bond, fiduciary liability insurance is relatively cheap compared to lawsuits even if you win.

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