Lawsuits against Plan Sponsors have reached a high water mark in the past decade. Whether this is due to overly aggressive law firms or a systemic trend of running afoul of ERISA liability issues among Sponsoring companies is up for debate. However, as companies move towards a wholly-driven defined contribution regime, the pitfalls of litigation will likely continue to be a challenge.
In recent years, companies have been embroiled in a range of litigation with regard to fees and investment plans. Overcharges, excessive fees, suitability of investment are among the issues raised in lawsuits. However, as Plan Sponsors take steps to shield themselves from litigation, they may be stepping onto a more slippery slope according to some legal experts and stepping directly into a deeper ERISA liability.
Citing an article on CFO.com:
According to a 2015 study of 254 plan sponsors by Aon Hewitt, 36% said they were “moderately” or “very” likely to switch some or all of their actively managed funds to index funds in 2016.
The article states that while the trend towards passive investments is already in place, the motivation to switch to passive investments (namely, to avoid litigation) will accelerate the move markedly. The article shows that 49% of target date funds (up from 36% from 5 years earlier) are passively managed.
If Plan Sponsors are moving towards passive investments to avoid litigation, they may be stepping into an ERISA violation and breach of fiduciary responsibility. The role of a fiduciary is to promote the interests of the participants, and not to protect the Plan Sponsor. So, even if the investments still perform well, Sponsors may be inviting further lawsuits if it can be shown that they moved to passively managed investments to avoid potential litigation exposure.
“Someone who has a clear view of what their fiduciary obligations are can’t respond to a survey saying they’re making decisions in a fiduciary capacity to protect themselves or their company from liability,” says Jamie Fleckner, a partner with law firm Goodwin Procter.
