401(k) Plan Litigation Update
A day does not go by that we don’t see a new lawsuit targeting 401(k) plans. Litigation appears to target some obvious weakness in how 401(k) plans have been managed in the past whether allowing over-priced investments or inappropriate proprietary options. And sadly many are being settled outside of the courts, a result that may encourage this litigious trend. Carol Buckmann wrote a great blog post pointing out many of the weaknesses that make a 401(k) or 403(b) plan a litigation target. Looking at her list, is there a better way to protect your plan from costly litigation?
The first weakness mentioned is adopting an investment policy statement (IPS) and then not following it. The court rulings support the importance of an IPS both in terms of what it says and doesn’t say and they absolutely will look at how it was followed. A typical IPS details the high-level objectives of the plan, outlines key principles that will be used to evaluate investments and will sometimes list specific thresholds that should be used to filter or exclude options and support the final choice. A common weakness of many investment policy statements is that they are not sufficiently specific or complete. Some fiduciaries believe that generalized wording, sprinkled with a few performance measurements, might provide more latitude for a favorable interpretation by the courts but this is a two-edged sword.
Perhaps a better way to protect your plan from litigation is to ask yourself whether your decision-making process might need an upgrade and, if so, focus more on designing, documenting and then following what I like to think of as an Investment Process Statement. Such a statement would set out a complete sequence of steps for both selecting and monitoring a plan’s investments. Attach it to the investment evaluation report so there is no question what steps were taken and what recommendation was made from those steps.
Another noted weakness is loading your plan with proprietary funds. In particular there have been a number of recent lawsuits focused on providers who have used their own funds regardless of their cost or performance or even whether they were well-aligned with the needs of their participants. It is important to understand that it is not the fact that investments are proprietary, perhaps managed by the same firm who record keeps your 401(k) plan that is the real litigation risk. Rather, it is the risk that the investment choice was affected by a relationship or a promised fee discount and was not determined solely selected for being in alignment with your plan’s needs, as evaluated using a prudent fiduciary decision process.
The answer is not to arbitrarily remove all proprietary options as this might increase your risk. Instead, as a fiduciary, ensure that you evaluate all investments options, using an unbiased, well-documented process that can reliably evaluate how well each option is aligned to your plan’s needs and demonstrate the prudence of your decisions.
Your duty doesn’t end with the selection of a good investment. To better protect your plan against litigation and to strengthen you defense if you are sued, you must also carefully monitor your plan investments. Importantly, your monitoring process should not be viewed as a lightweight exercise. It needs to be designed, documented and implemented as carefully and comprehensively as the initial selection.
Fortunately, new technologies are now being used to create tools that can greatly assist plan fiduciaries to follow a well-designed and prudent decision-making process. Taking a few thoughtful steps can not only make you a less appealing target for litigators, it should help you to improve the financial security of your employees, which benefits both them and your own bottom line. Consider using the services of professional retirement advisers and ask about adding BDTOOLS reports to your protection files.
