401k Lawsuits Deserve Attention from Plan Sponsor
401k lawsuits are on the rise. However, the legal responsibilities associated with 401k lawsuits are not always crystal clear. Plan fiduciaries who manage and administer 401k and 403b plans struggle with knowing how to perform. There are many grey areas, and so questions persist about fiduciary duties and 401k lawsuits.
A 2018 paper from the Center for Retirement Research at Boston College explores the reasons behind these lawsuits, as well as their implications for plan sponsors and the retirement industry. According to the CRR paper, there are three primary reasons for 401k lawsuits: 1. Inappropriate investment options, 2. Excessive fees, and 3. Self-dealing. By design, the Employee Retirement Income Security Act (ERISA), the law that governs defined contribution (DC) retirement plans like 401ks and 403bs, isn’t very specific about fiduciaries’ responsibilities. As such, there are no real precedents, and fiduciaries are often challenged to make prudent decisions in the eyes of regulators.
Here is what CRR had to say about ERISA related fiduciary responsibility vis-a-vis the recent uptick in 401k lawsuits:
- ERISA is clear that plans must be administered for participants’ “sole benefit”- and beneficiaries, if applicable;
- Typical 401k lawsuits are not helpful in knowing how investment options should be chosen or how to determine the reasonableness of fees.
- The Department of Labor (DOL) hasn’t offered a lot of specific help. Rather, it has overseen retirement plans mostly through its own enforcement or litigation.
- From the courts’ perspective, fiduciaries’ primary duty is to follow a prudent process for making plan-related decisions.
According to CRR, citing data from Bloomberg’s Bureau of National Affairs, over 100 new 401k complaints were filed in 2016-2017, the highest two-year total since 2008-2009. Clearly, plan sponsors should pay attention to the causes of these 401k lawsuits and their potential consequences for participants and plan fiduciaries. Again, the majority of 401k lawsuits have been brought as a result of inappropriate investment choices, excessive fees, and self-dealing, per the CRR paper.
So how are plan fiduciaries to handle these issues in an effort to avoid litigation and personal liability? For starters, retirement plan fiduciaries and committees must commit to a dedicated, formal, and prudent governance process for making all plan-related decisions. Sponsors should keep detailed records of these processes, and carefully document in writing the policies and steps fiduciaries have taken to reach their decisions.
When it comes to investment selection for the plan — a key reason for 401k lawsuits — ERISA isn’t explicit. According to the CRR paper, “Two fiduciaries could choose the same investment option and face different risks of liability if one followed a prudent decision-making and monitoring process — for example, by considering the performance and costs of relevant benchmarks — and the other did not. So, plan fiduciaries have tended to face this kind of litigation when their funds have experienced persistently poor historical performance compared to similar “benchmark” funds.”
For starters, having an Investment Policy Statement (IPS) in place that details the plan’s investment approach and sets general guidelines about how the funds should be selected and the investment menu structured (i.e., does the plan offer just stocks and bonds and the like, or should different styles, like value and growth, be considered?). The IPS should also outline the committee’s actions beyond investment selection, including criteria for monitoring the investment lineup and instructions for removing funds when necessary. Again, prudent process — and the documentation of said process — is key when it comes helping plan fiduciaries to avoid 401k lawsuits.
The CRR paper also looks at excessive fees as a chief cause for 401k lawsuits, which often include allegations of “excessive fees.” Again, plan fiduciaries must exercise prudence in determining the reasonableness of plan fees under ERISA, and be able to show that the services being provided are necessary and value-added to the plan and its participants. The fees that come under scrutiny are investment and administrative fees. With regard to investment fees, according to the CRR paper, “… in choosing which funds will be offered, fiduciaries must select funds that charge no more than a reasonable fee, and the fiduciaries must periodically assess whether such fees continue to be reasonable in light of alternatives… In addition, the fiduciary must take steps to ensure it is offering the lowest-cost version, or “share class,” of a specific fund available to the plan.”
Pertaining to administrative fees and 401k lawsuits, “Though courts generally defer to fiduciaries about whether a fee is reasonable, fiduciaries are required to take prudent steps to assess the fees and to determine whether the services are necessary,” according to CRR. Again, careful documentation and support for the process in determining plan fees is tantamount for plan fiduciaries to be able to show that they have, indeed, acted in the best interest of the plan and participants, thus upholding ERISA’s prudent person standard.
Finally, self-dealing refers to when plan fiduciaries act in their own best interests, as opposed to those of the plan and its participants. Plan sponsors can be held liable in 401k lawsuits for doing so, however. Self-dealing lawsuits have become more common, according to CRR.
In short, plan fiduciaries should implement carefully documented processes to ensure that plan committees are upholding the high standards set forth in ERISA, and that they are acting in the best interests of the plan and participants, especially when it comes to decisions around investment management, fees and self-dealing. In so doing, plan fiduciaries have a better chance of doing the right thing legally, ethically and morally for their constituents while also avoiding 401k lawsuits.
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