DON’T MAKE YOUR 401K A LITIGATION TARGET by Carol Buckmann
“I know there are a lot of lawsuits over 401k fees and investments, but nobody here is complaining. Are we really at risk of being sued?”
Several clients have asked me this question in recent months, and unfortunately, I had to answer- “Yes, you are at risk because no plan is safe when there are so many class action lawyers out there aggressively looking for lawsuits to file.” And, in fact, some of the defendants in those lawsuits seemed not to have taken their fiduciary duties seriously. I added that some plans are more attractive lawsuit targets than others, and there are things fiduciaries can do to lower their risk of being hit with a 401k lawsuit.
Here are my suggestions:
- Make sure plan responsibilities are clearly defined and the people working with the plan understand what they are expected to do.
- Regularly monitor services, investments and fees to make sure that participants have good investment options and aren’t overpaying for services (since usually these fees are deducted from their accounts.) The best way to do this is by regularly benchmarking and doing regular RFPs. But remember, performance counts, too, and you don’t want to have a menu of poorly performing funds just because they have low fees.
- Engage a fiduciary investment advisor and other experts to assist you and ask them to produce written reports with the reasons for their recommendations.
- Meet regularly to review your plan and consider alternatives to the current menu of investment options, such as collective trusts instead of mutual funds and stable value funds instead of money market funds. Document the reasons for your decisions even if you don’t make any changes.
- Make low-cost index funds available as an investment option.
- Know the differences between share classes and pick the class with the lowest fees.
- Understand your plan’s default investment and the alternatives. Target-date funds vary greatly in fees structure and asset mix, and that they are not the only choice that satisfies the qualified default investment safe harbor.
- Have written plan policies and follow them. A good investment policy is key.
- Have clear and helpful plan communications and a good website. Respond quickly and clearly when participants have questions.
Even if you do all of this, you will never be completely protected against lawsuits. However, courts do not expect you to have a crystal ball. If you have written evidence that you have followed prudent procedures, you will have the best defense and, if you can’t get the case dismissed, you are likely to have it resolved in your favor.
Carol Buckmann is a founding partner at Cohen & Buckmann PC, and has practiced at major law firms specializing in the areas of employee benefits and executive compensation for over 30 years. Carol frequently blogs, writes articles and is quoted in the media about current employee benefit issues. For more info click here.
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