The recent spate of lawsuits against defined contribution (DC) plan sponsors by their participants has many companies wondering, according to a noted ERISA law firm, whether they should keep their DC plan altogether. Though many suits may not have merit, more and more providers and plan sponsors are settling rather than paying huge legal bills as more plaintiffs’ attorneys, emboldened by the success of these lawsuits, are willing to take the cases.
Three lawsuits are of particular interest all against large, well known plan sponsors and providers. The case filed against Anthem by plan participants alleges that the company did not use the lowest share class available and should have considered using lower cost options to mutual funds like collective trusts (CITs) and separately managed accounts (SMAs). The irony is that the provider is Vanguard, considered to be the lowest cost provider. Regardless, the Anthem participants allege that lower share classes were available which raises the question of whether plan sponsors have to seek the cheapest options or just reasonable ones.
The suit against Intel is focused on the use of alternative investments like hedge funds within a custom target date fund. According ERISA attorney Marcia Wagner:
The reasonableness of the Intel plans’ investment fees is one of the many fiduciary issues raised in the new Intel case, but the core issue is whether the plan’s investment options should include exposures to alternative asset classes….[T]he Intel plans offered customized model portfolios that included a target date strategy, as well as a balanced strategy. These model portfolios provided exposures to various asset classes, including alternative investments, that is, hedge funds and private equity. The participant complaint alleges that the alternative investment allocations were too high and that they were determined imprudently by the plan fiduciaries.
Perhaps seeking higher returns in a low market return environment, Intel went outside the “box” for sure but does that mean that they violated their fiduciary responsibility? Should the selection of investments be second guessed if a documented, prudent process is followed?
Finally, a participant in a relatively small plan ($7.1 million) recently sued one of the largest DC record keepers, Empower-Retirement, alleging high fees in the Krikorian et al. vs. Great-West Life & Annuity Insurance Co case seeking class action status for all of the almost 8 million participants in that provider’s plans. The suit alleges that the fees received by Empower-Retirement were high and had no relationship to the services provided. Of note is the size of the plan and, if class action status is granted, then all 8 million participants in DC plans record kept by Empower will be included.
So what should plan sponsors be doing to protect themselves? Look for a 401kTV webinar on March 9th at 4:00 ET to discuss the issue.
