In a recent article White Paper entitled, “Process Remains Critical Factor in ERISA 401(k) Plan Litigation”, Marsha Wagner, The Managing Director of the Wagner Law Group explains how adhering to a prudent 401k process of best practices (prudent process) can reduce the risk of liability in 401(k) lawsuits.
Back in December we wrote an article on How to Avoid a Class Action 401k Lawsuit, where we echoed a similar sentiment, however, it was noted that we felt it was virtually impossible to completely avoid a lawsuit while Wager shows clearly how to effectively defend yourself and your company against one.
While this is a cursory (and not comprehensive) examination of an actual court case, it is held out only as an example of the plan sponsor prevailing due in large measure to an adherence to prudent process.
Here is a quick breakdown of Wagner’s assessment on the issues:
Breach of Loyalty
Citing the case of White v. Chevron Corporation, Wagner points out that the court agreed with the defendant by dismissing the allegation that Chevron “violated their duty of loyalty by offing a money market fund versus a stable value fund; by offering higher cost funds rather than less expensive funds; and by retaining a particular fund despite its underperformance.” The court opined that the plaintiff failed to show that Chevron took “actions for the purpose of benefiting themselves or a third party at the expense of the plan participants, or that they acted under any perceived or actual conflict of interest.”
The Court noted that there is nothing in ERISA that compels a plan to include a stable value fund AND the Investment Policy Statement (IPS) did not contain any such language. Furthermore, as for the performance issue, the Court ruled that “actions of a fiduciary are judged based on information available at the time of each investment decision and not from the vantage point of hindsight.” In this case adhering to a well-crafted IPS helped avert liability.
Excessive Management Fees
The Court ruled that fiduciaries have latitude in assessing the value of investment options beyond price, and are even compelled to do so. Nowhere within ERISA does it say that fees must be the cheapest available. In fact there are no per se investment rules stated within ERISA for fiduciaries to follow.
Once again, the notion of a sound, prudent process was the best defense against an aggressive law firm.
Revenue-Sharing Fee Plans
Revenue-sharing plans have begun to attract scrutiny, but in the case of Chevron, the Court ruled against the plaintiffs that such fees are excessive per se. It also noted that revenue-sharing was a common and acceptable practice whose benefits commonly inure to plan participants.
