Avoiding DC Lawsuits: A NYC law firm
lays out ways that defined contribution (DC) plan sponsors often set themselves up as a target for litigation. Putting on a more positive spin, here are simple and cost effective ways for plan sponsors to avoid litigation and potential DOL/IRS fines:
- Investment Policy Statement – Though not required, an IPS is a prudent method for DC plans to determine which funds are appropriate for their plan and participants. The DOL will often ask for it in an audit. But the problem is that many plans never consult it again not adjusting it as the plan and the employee base changes. Also, the IPS can be so narrow that it’s impossible to follow or opens up the possibility for the investments to be out of sync.
- Benchmark and RFP Fees – Any provider paid out of plan assets much be periodically benchmarked and/or RFP’d. That includes record keepers, advisors, money managers and even TPAs. Best practices call for annual benchmarking, RFP for record keepers every three to five years and every five to seven years for advisors. Investments should be reviewed quarterly.
- Proprietary Funds – Though not a per se violation, selecting a record keeper’s or advisor’s proprietary funds without prudent, documented due diligence is another red flag. Many small plans just accept their record keeper’s target date fund because there are no other alternatives.
- Hiring Help – Plan sponsors are expected to act as a prudent expert but few have that kind of in-house expertise. Best practices call for plans to hire a fiduciary advisor whose compensation does not vary with the investments recommended.
- Multiple Record Keeper – Common among 403b plans, costs and complications can lead to litigation and fines.
- Committee Meetings – Form one. Hold regular meetings. Document.
Like dental care, regular and simple prophylactic care for a DC plan using a good professional prevents more serious problems like fines and litigation. And even if smaller plans are not yet the target of DC lawsuits, why wait?
