How to Manage Fiduciary Liability Through Prudence and Care

By Joanne Sammer July 5, 2023

​In the past few years, retirement plan sponsors have been getting strong signals about the need to carefully manage and monitor their plans.

In January 2022, the U.S. Supreme Court ruled in Hughes v. Northwestern University that the university had neglected to act with prudence and care because it had not negotiated lower plan fees on behalf of plan participants. The court also found that simply offering an array of investment options is not enough. Plan sponsors must regularly evaluate the prudence of those investment options and act to remove investments deemed imprudent within a reasonable amount of time. 

Now, a surge in litigation involving questions about retirement plan sponsors' fiduciary responsibilities makes the Hughes decision even more significant for plan sponsors. 

Data compiled by insurance company Chubb shows the number of fiduciary liability lawsuits increased more than fourfold between 2019 and 2020. Following a drop-off in 2021, likely as a result of the COVID-19 pandemic, these lawsuits bounced back and approached 2020's levels in 2022.

Fiduciary liability lawsuits are being aimed at plans of all sizes. Smaller plans can no longer assume they will be exempt from the threat of litigation, since roughly one-fifth of lawsuits are now directed at plans with less than $500 million in assets, according to Chubb. 

Reducing Fiduciary Liability Risk 

Not surprisingly, plan sponsors are concerned about potential fiduciary liability exposure, and managing this risk has assumed greater importance. At the same time, however, purchasing fiduciary liability insurance is not as easy as it used to be. "If plan sponsors want fiduciary liability insurance, they have to show that they are on the ball," said Carol Buckmann, an attorney with law firm Cohen & Buckmann in New York City. 

In addition to higher premiums, plan sponsors face more-detailed applications for coverage that require extensive information about plan policies and procedures, Buckmann said. Those policies include ones regarding choosing and managing service providers and benchmarking plan fees. 

However, plan sponsors' efforts don't end with insurance. "Having insurance is not the goal," said Andy Larson, director of education at the Retirement Learning Center in Brainerd, Minn. "The goal is to reduce risk."

Achieving this goal requires strong retirement plan governance, which can be a bulwark for risk mitigation. "If you have a good process, document it and follow it, you should be in good shape from a liability perspective," Larson said. 

But what does a "good process" look like? These four steps are key to building one. 

1. Review the plan regularly. The foundational step in reducing potential fiduciary liability is oversight. That includes conducting regular reviews of the entire retirement plan to make sure it is serving the best interests of plan participants. 

Larson suggested developing a 36-month master calendar of tasks to help manage this process and to avoid overlooking any key activities. This review can include service agreements to make sure  vendors are providing agreed-upon services, that fees are appropriate and that the plan is functioning with necessary oversight. If a plan sponsor delegates some or all fiduciary responsibilities to a committee or investment manager or advisor, it is important to keep minutes and records of how and why the plan sponsor makes its decisions regarding the plan. 

As retirement plan services become more comprehensive and competitive, plan sponsors need to make sure they are providing adequate and cost-effective plan services to participants. Regularly benchmarking plan fees and services is a good way to make sure retirement plans are keeping up with what is available in the marketplace and at what cost. Although there is no specific mandate for plan sponsors to provide a retirement plan with the lowest possible costs, they do need to make sure their plans are providing value relative to fees charged to the plan and participants. However, plan sponsors should not rely on retirement plan service providers to conduct this benchmarking. It should be done by an independent third party to avoid any conflicts of interest. 

2. Think and act carefully when adding new investments. Prudence is the watchword when it comes to changing or adding plan investments. "Many plan sponsors do not understand that they are not responsible for fund performance or whether participants are ready to retire," said James Watkins, managing member of InvestSense in Atlanta. "They just have to select prudent investments." 

Although plan sponsors can hire someone to help choose and monitor plan investments, doing so does not necessarily absolve the plan sponsor from potential fiduciary liability when it comes to investment choices. 

Using this standard, plan sponsors need to consider whether adding new types of investments, especially those without a long track record of performance, meets this prudence threshold. For example, plan sponsors generally want to be responsive to participant interest in and requests for greater diversity in plan investments. However, as they weigh whether to add self-directed brokerage accounts, annuities, funds that invest in cryptocurrency, or funds that consider environmental, social and governance factors when choosing investments, plan sponsors will also have to consider how these additions might increase their fiduciary liability risk. 

"A fiduciary has to act solely for the exclusive benefit of participants," Watkins said. "If there is any uncertainty about that, why go there?" 

In addition, new types of investments bring a learning curve for plan sponsors and their advisors. "Plan sponsors may have to change their evaluation and assessment method, but they should not rely on a salesperson (for a specific product) to serve the role of investment consultant," Larson said. In this case, the weakness may not be in the new investment vehicle, but in the process used to evaluate it. 

3. Emphasize information and education. Another area of focus is making sure plan participants have access to the information they need to make decisions about the plan and their investments. For example, if plan sponsors offer access to information designed to help participants make better investment decisions, such as financial planning tools or financial education materials, it is a good idea to monitor utilization by reviewing vendor reports regularly. 

"The U.S. Department of Labor expects plan sponsors to be aware when usage is low and undertake active initiatives to improve those numbers," Larson said. Utilization does not have to increase by huge numbers for this effort to be worthwhile. The key is for plan sponsors to be able to show that they are aware of any issues and are taking steps to address them. 

4. Stay current. Legal and regulatory questions about fiduciary liability are continuing to evolve. Therefore, plan sponsors need to be ready to address new areas of risk as they emerge. For example,  cybersecurity is a growing concern in all areas of life, and retirement plans are no exception. After all, thieves go where the money is. A stolen password or act of deception used to gain access to plan participants' personal information could lead to hacked accounts and disappearing retirement savings. To counteract this risk, plan sponsors need to work with vendors and educate plan participants to safeguard their accounts as much as possible. 

While the threat of litigation continues, that too is changing. More fiduciary liability cases are going to court rather than being quickly settled. As a result, some cases are being thrown out even before the discovery process or trial gets underway. "Courts are going after cookie-cutter cases and plaintiffs who lack standing [to bring a suit]," Buckmann said. This trend could winnow out more cases or keep certain types of lawsuits from ever being filed. 

While the importance of fiduciary issues will continue, plan sponsors do have tools available to protect themselves. The key is to use those tools before problems emerge. 

Joanne Sammer is a freelance writer based in New Jersey.



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