Keep Your 401(k) Plan Out of Fiduciary Hot Water

Following these best practices can lower the risk of class-action lawsuits

By Stephen Miller, CEBS Jun 27, 2016

Class-action litigation against employers that sponsor 401(k) and similar defined contribution retirement plans is on the rise across the U.S.

These lawsuits typically allege that participants’ retirement savings were compromised because employers, as plan fiduciaries, failed to act in participants’ best interests and breached their duties under the Employee Retirement Income Security Act (ERISA) by allowing high fees, bad fund choices and conflicts of interest.

Fortunately, there are ways to mitigate plan sponsors’ risk of being sued, but employers must be proactive, advised fiduciary attorneys who spoke at the Society for Human Resource Management 2016 Annual Conference & Exposition in Washington, D.C.

“Avoiding fiduciary liability doesn’t have to be hard; keep it simple and follow best practices,” said Anne Pachciarek, a partner with law firm DLA Piper’s Chicago office.

Pay particular attention to the biggest sources of fiduciary liability—the payment of excessive fees and the selection of imprudent investments, she recommended. And keep an eye on fund administrative costs.

Excessive Fund Fees

The unanimous May 2015 U.S. Supreme Court ruling in Tibble v. Edison International held that fiduciaries for 401(k) and similar plans have a continuing duty to periodically monitor and remove imprudent investments—separate from their duty to exercise prudence in selecting investments. That, Pachciarek said, provides support for lawsuits that target high fees borne by participants, including:

• Use of inappropriate high-cost “retail” fund classes after lower-cost institutional shares become available.

• Offering actively managed funds that are little different from lower-cost index funds (these are referred to as “shadow” or “closet” index funds).

• Use of inappropriate fund benchmarks.

“When you’re dealing with participants’ money, as opposed to the employer’s money, the bar for diligence is set high,” said Mark Boxer, a partner in DLA Piper’s San Francisco office. He recommended that plan sponsors:

• Review and understand record-keeping fees, and also review required fee disclosure statements for completeness.

• Review and understand fund investment fees.

• Maintain records, such as investment committee minutes documenting discussions around fund selection and vendor services.

“ERISA is all about process. It’s not necessarily to only select the lowest-cost funds” unless essentially similar but lower-cost funds are available, Pachciarek said. However, “it is essential to be able to show the rationale for [fund-selection] decisions.”

Even with index funds that cover the same benchmark, such as the S&P 500, fund fees can vary from over 1 percent to as low as 10 basis points (0.10 percent), Boxer noted, so “Always ask your investment advisor to show price comparisons.”

Vendor Fees

The attorneys took a dim view of paying record-keeping and other plan administrative fees through revenue sharing, also known as 12b-1 fees, which are silently deducted from fund assets within the plan. “Plan sponsors will tell us they pay no plan fees, but their participants are getting raked over the coals when 12b-1 fees are used to offset costs,” Boxer said.

Not surprisingly, revenue sharing has been an issue in a number of lawsuits against plan fiduciaries. While paying for plan services through revenue-sharing payments is legal and widespread, it’s “a red flag” for litigation if fees are deemed excessive, Pachciarek said.

Best practices regarding plan administrative services include:

• Review vendor relationships periodically.

• Review investment education materials for conflicted advice.

• Update contracts.

Boxer recommended periodically putting vendor contracts out to bid, such as by sending out requests for information (RIFs) every three years, and requests for proposals (RFPs) every five years. In addition to the plan’s record keeper, “monitor the fees of investment consultants and advisors as well,” he said.

Investment Committees

While not a legal requirement under ERISA, both attorneys strongly advised assembling an investment or retirement committee that includes management- and nonmanagement-level employees. The attorneys recommended that the committee:

• Have a formal committee charter.

• Meet at least quarterly, with a comprehensive investment review once a year. “Having a committee and not convening regularly is worse than having no committee,” from a liability standpoint, Pachciarek said.

• Keep minutes documenting why decisions were made.

• Adopt an investment policy statement. “ERISA doesn’t exactly require you have one, but if your plan is audited by the Department of Labor, the auditor will ask for it,” said Boxer.

• Provide committee members with fiduciary training, either as a group or online individually. Training should be repeated as the committee’s composition changes.

Boxer prefers expanding the committee’s agenda beyond retirement and having a “benefits administrative committee” that also covers the health plan and perhaps other benefits, as a way to engage committee members and motivate them to attend meetings.

Looking forward, more lawsuits are expected, especially in light of the Department of Labor’s recent final rule on conflicted investment advice, Boxer said.

“Think, pay attention and review your documents,” he urged.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

Related SHRM Articles:

401(k) Plan Sponsors Are Focused on Fees, SHRM Online Benefits, May 2016

Fee Allocation in 401(k) Plans: Choose Your Model, SHRM Online Benefits, February 2016

401(k)s Shifting to Fixed-Dollar, Per-Head Fees, SHRM Online Benefits, October 2015

A 401(k) Fiduciary Checklist, SHRM Online Benefits, July 2015

Supreme Court: Fiduciaries Have Ongoing Duty to Monitor Investments, SHRM Online Employment Law, May 2015


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