What the Average Plan Fiduciary Can Learn from the ERISA Fee Cases
Over the past 10 years, there have been myriad lawsuits filed by participants against plan sponsors and administrators claiming that the investment options made available for 401(k) accounts or the administration fees have been too expensive. The first highly publicized lawsuit of this nature was the case of Hecker v. Deere in 2009, where the court found in favor of the qualified plan and outlined some of the bases for the way these cases are decided that are used to this day. A 2018 case, Sacerdote v. NYU, continues to illustrate courts’ approaches to these cases. As plaintiff lawyers have gotten wiser about how to prosecute these suits, and as some of the more abusive situations have been exposed, it is clear there are many lessons that fiduciaries can learn from these cases.
Here are some of these lessons:
- The process is more important than the result. No one expects investment fiduciaries to predict the future. The best financial managers can be wrong about what the market will do. But, the obligation of those making investment decisions is that their decisions be well thought out, and that proper due diligence is conducted prior to implementation.
- Proving the process is important. It is critical that each process is documented at the time it takes place. Keeping the information that was examined, noting what concerns were considered, and memorializing the reasons for the decisions made are the elements of this documentation. The courts will give the fiduciaries huge deference in their decisions, so long as there is a documented trail that fiduciaries, engaged in their duties thoughtfully.
- Continuous re-evaluation is part of the prudent process. Making prudent investments decisions is important. Monitoring those investments to make sure that they remain prudent is equally important. Be sure the investment fiduciaries (i.e., the committee) meet at least twice a year (quarterly is even better) to review fund performance, note the underperforming funds, have a plan for their replacement if they continue to lag the benchmarks, and take action when needed.
- Hiring good helpers can be worth millions. In the NYU case, the plan committee members made some astonishing admissions about their lack of expertise and engagement in the investment process, some even admitting that they didn’t know whether they were committee members or what their responsibilities were. But, the financial advisor for the plan took enormous initiative to ensure that necessary processes took place, including investment reviews and periodic RFPs for the service providers. In short, he saved the plan fiduciaries in many ways from a bad result.
- Acts that’s violate ERISA are not prudent. In cases where there are actual violations of the law that governs retirement plans (the Employee Retirement Income Security Act or ERISA), the courts are much less forgiving of the plan sponsor. In a case where plan assets were used to pay fees of another plan that covered only executives, the court awarded significant damages to the employees. So, it is important that the plan fiduciaries know what is prohibited and do not go astray of those rules.
Corporate law has the “business judgment rule,” where the courts will not overturn decisions made by a Board of Directors that has acted prudently. This is the “no Sunday morning quarterback” rule that keeps the courts from looking back and judging from an unfair vantage point based on the results. A similar rule applies for plan investments. If the fiduciaries of the plan act prudently, periodically, and thoughtfully in making their decisions, and do the documentation needed to prove those processes, they will likely find that they are in good stead if a lawsuit comes down the pike.
Ilene H. Ferenczy, J.D., CPC, APA, is the Managing Partner of Ferenczy Benefits Law Center, an employee benefits law firm in Atlanta, Georgia. She advises clients on all types of employee benefit plans, particularly focusing her practice on qualified retirement plans, benefits issues in mergers and acquisitions, and advising third-party administrators of employee benefit programs on technical and practice issues.