Steering board members clear of being named plan fiduciaries is a start.
- Most board members do not want to become 401(k) plan fiduciaries.
- Make sure the 401(k) plan does not name the company, the board or any board committee an ERISA named fiduciary.
- Make sure the charter of the compensation committee does not give the committee fiduciary responsibility for 401(k) matters
According to Bloomberg's Bureau of National Affairs, over 100 new 401(k) complaints were filed in 2016-2017, the highest two-year total since 2008-2009 (Bloomberg BNA 2019 ERISA Litigation Tracker). The pace of these lawsuits has continued into 2019. The focus of these class action lawsuits centers on the assertion that the plan fiduciaries (i) made inappropriate investment choices and (ii) administrative and investment fees were too high. An ERISA fiduciary must act for the exclusive benefit of participants, provide benefits and defray reasonable administrative expenses and invest the plan's assets in a prudent, diversified manner in accordance with the plan documents.
A person becomes an ERISA fiduciary if they are appointed to that position or are named in the plan document ("named fiduciary") or exercise discretionary authority or control over the plan's administration and/or investments. Most plan documents provide—and conventional wisdom supports—that the company (and therefore the board) is the plan's named fiduciary. However, a company that establishes and maintains the plan, the plan sponsor or "settlor" of the plan, is not necessarily a fiduciary. ERISA does not require that the company plan sponsor be a named fiduciary and allows this function to be outsourced by the company.
While it is not free from doubt that the board can completely outsource the named fiduciary function by naming someone else as the named fiduciary, and plaintiffs are likely to include the company/board as a defendant in a lawsuit, the board should at least take any necessary steps to mitigate or avoid being named as or acting as a fiduciary.
If the board of directors adopts a 401(k) plan, the plan document does not name the company plan sponsor as a named fiduciary but instead names, for example, a benefits committee (comprising subject matter expert employees), and the board exercises no discretion regarding the membership of the committee, the administration of the plan or its investments, then the board has best positioned itself to argue that it is not a plan fiduciary subject to a claim of a breach of fiduciary duties. Not only that, but it has prudently set into motion the best governance practices for the plan.
Optimal Structure for Avoiding ERISA 401(k) Class Action Litigation
The board of directors should limit its role to adopting and amending the 401(k) plan (or having an authorized officer do so) as plan settlor and not as a fiduciary. If, after consulting with counsel, the company (as plan sponsor) decides it wants to pursue this alternative approach of amending its 401(k) plan to designate a benefits committee as the named fiduciary, the amendment should be adopted by an officer who does not otherwise act as a fiduciary. And, to hedge against the risk that such an act could be interpreted to make the officer a fiduciary, the officer should play a limited role with regard to the 401(k) plan, including not adopting any other plan amendments. This would avoid a claim that the officer wears "two hats" and is not just acting as a non-fiduciary settlor were he/she to adopt future plan amendments. Finally, the charter of the compensation committee should give the committee only general oversight over all benefits. The committee should not appoint members of the benefits committee or specifically review its performance.
Practice Note: It is critical then that the plan document and the summary plan description (SPD) name a fiduciary other than the company plan sponsor as the party with discretionary authority over plan administration and investments.
The plan document/SPD should name a benefits committee as the named fiduciary responsible for plan administration and investments and identify committee membership based on employment positions/titles. The benefits committee should have a charter with self-perpetuating membership and a specific list of its responsibilities over administration and investments. The 401(k) plan is an operational matter and falls most prudently and organically with employees with expertise in finance, HR and legal. We recommend that employees who are not executive officers and who have sufficient time and expertise occupy these roles. Board members generally are not 401(k) plan experts on plan administration and investments.
Practice Note: In addition, it is critical that the charter of the compensation committee not give the committee any specific responsibilities regarding the 401(k) plan. If a benefits committee is named in the document as the named fiduciary then the charter must not require that the compensation committee review the benefits committee and the benefits committee charter should not require that it report to the compensation committee.
The benefits committee may want to adopt an investment policy with the assistance of its investment advisor (see below) and maintain adequate fiduciary insurance (at least $15 million – $20 million of coverage for a plan with $1 billion or more of assets). Furthermore, benefits committee members should be indemnified by the company from losses and litigation expenses not arising from misconduct/fraud.
To avoid claims for administration or investment breaches, we recommend that the benefits committee assign its fiduciary duties in writing by appointing:
- a third-party plan administrator to administer the plan,
- an investment manager to select the plan's investments, and
- an investment advisor to review the manager-selected investments/expenses against investment policy benchmarks.
A lawyer who is an ERISA subject matter expert should review all the service provider contracts, the fiduciary insurance policy and the indemnification agreements.
All of these selections and appointments should follow a robust RFP with a good record of the selection criteria. The benefits committee should meet with its advisors on a regular basis to track investments and expenses and keep good minutes of the meetings. RFPs should be conducted every three-five years.
The foregoing best practices will reduce any risk of 401(k) class action litigation, reduce the risk that board members become involved in lawsuits but most importantly result in a retirement program that is appreciated and utilized by employees.
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.