A recent spate of lawsuits against large employers' 401(k) retirement plans (a Plan) has refocused attention on the need for plan administrators to ensure that they are honoring their fiduciary duties and prudently managing their Plans. Many of these recent lawsuits allege that Plan administrators use costly investment options, fail to consider alternative investment options, and fail to exercise negotiating power to reduce fees.
While there is no magic bullet to preventing such lawsuits, Plan administrators should take several steps now to ensure that: (a) they have good answers when plaintiffs' lawyers come knocking on the door, and (b) they have good defenses when lawsuits are filed.
- Benchmark:When evaluating what
investment options to offer, a detailed analysis of the fees,
investment strategies, and past performance of various funds is
critical to ensuring that the Plan administrator acts with
sufficient knowledge and can make an informed decision. A Plan
administrator is not required to choose the lowest cost
alternative, but an analysis like this one can help avoid hindsight
bias if a Plan administrator chooses a more expensive option.
Third-party investment advisors offer a variety of such
services.
- Regularly Reevaluate:Like everything
else, investment options change over time.Setting a regular
schedule to reevaluate existing investment options ensures that
what may have been a competitive and prudent choice in past years
no longer makes sense for the Plan and its participants.
- Negotiate:Retirement plans have
leverage, though the amount of that leverage of course varies with
their size. Nevertheless, there is certainly no harm in contacting
investment funds (or third-party record keepers, for that matter)
and attempting to negotiate lower fees on behalf of the Plan's
participants.
- Offer a Variety of Investment
Options:One way to act as a fiduciary to Plan participants is to
ensure they have a wide range of investment options available to
them under the Plan. While some participants would surely prefer
the lowest fee passive investment option, others would just as
surely prefer investing in an actively managed fund, even if the
fees are a bit higher. By offering both passive and actively
managed options to participants, Plans can provide the preferred
approach for both types of investors.
- Make Detailed Investment
Disclosures:In conjunction with offering a range of options, a
prudent Plan administrator will also provide substantial
information to participants about each option.Such disclosures will
include a fee schedule. In fact, ERISA requires an annual fee
disclosure to be provided by a Plan administrator to participants.
By providing: (1) a variety of investment options and (2) detailed
information regarding each option, it becomes difficult for a
participant to complain about the Plan's decisions.
- Attend Fiduciary Training: Consider having all
individuals who act in a fiduciary capacity attend recurring
training on their fiduciary duties. Regular reminders of
obligations and best practices for ERISA fiduciary duties ensures
that fiduciaries are aware of current best practices, as well as
the types of litigation that are percolating.
- Document Everything:Finally, and most importantly, it is vital that the Plan administrator document in depth all of the actions it has taken – and the reasons for those actions -- to ensure that it is acting as a prudent manager and as a fiduciary to the Plan's participants and beneficiaries. As important as it is to do all the right things, it is equally important to be able to prove that you did them. For better or worse, we live in a time and place where people expect to see documentation. Any steps that an administrator or committee claims to have taken, but which cannot be proven through contemporaneous documentation, will be subject to great scrutiny.
Of course, none of these steps are foolproof on their own, and even well-prepared Plans face frivolous lawsuits. However, when taken collectively, these steps help ensure that a 401(k) plan does not present a soft target for a plaintiff's lawyer looking for a big payday.
Originally published by Foley & Lardner, August 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.