Cohen & Buckmann, P.C.
Cohen & Buckmann, P.C.



How To Make Your 401(k) or 403(b) Plan a Litigation Target

How To Make Your 401(k) or 403(b) Plan a Litigation Target


By Carol Buckmann

Nobody wants to be sued.  Still, writing about plan fee and investment litigation really focuses attention on what plan fiduciaries are doing (or not doing) to come into the sights of the class action lawyers representing plaintiffs.  Sometimes it seems as if these defendant fiduciaries were almost asking to be sued, since the practices being described in the complaints are so vulnerable to challenge. These lawsuits keep proliferating, so fiduciaries of 401k and 403b plans would be well advised to learn from what the defendants were alleged to have been doing wrong.

If you want to invite a lawsuit, do the following----

                Adopt an Investment Policy Statement, then never consult it again.  Outside advisers rightly urge their fiduciary clients to adopt a formal investment policy statement (IPS) setting forth the goals and procedures for selecting, monitoring and replacing investments.  Yet adopting a policy and not following it can be worse than not having a written policy at all.  The Department of Labor considers the policy one of the instruments and documents governing the plan, which means that mere failure to follow the IPS can be a fiduciary breach. More importantly, failure to follow the IPS will likely result in your participants having a sub-optimum investment menu.

                Don’t Benchmark Your Fees or Do Periodic RFPs.  If you are happy with your current provider, why do this?  You need an ongoing reference to determine whether you are overpaying for services and whether other competitors might be providing useful additional services that your current provider doesn’t offer.  You might find reasons not to be so satisfied with your current provider, but at the least, you will know whether you should be renegotiating your current provider’s fees.

                Load Your Investment Menu with Proprietary Funds.  Recent litigation has focused on providers who put their own funds in their employee plans even though they weren’t top performers.  Another red flag is the use of the provider’s target date funds without investigating whether they are the best in their class.

                Try to Do Everything In House.  Unless you are a very large business with employees who have real expertise about pension investments, and the time to properly review them, you are courting disaster trying to do everything in house.  With smaller businesses this is sometimes a result of a reluctance to cede control to an outsider rather than trying to cut costs.  However, just about every plan needs professionals advising about investments and fees.  And those professionals should acknowledge that they are ERISA fiduciaries, regardless of what happens with the Fiduciary Rule under the new administration. There are many good advisers currently operating under a fiduciary standard to choose from.

                Enter into a Revenue Sharing Arrangement, then fail to monitor payments.  There are alternatives to paying for plan services through revenue sharing that are more transparent, but if you do enter into a revenue sharing arrangement, make sure that your provider isn’t being overpaid or that revenue sharing is not being used to pay for services to the plan sponsor rather than the plan participants.

                Use Multiple Recordkeepers and Providers.  This has become a big issue in the lawsuits that have recently targeted large universities and health care providers who sponsor 403b plans.  Often there may be historic reasons for using multiple providers, but the use of multiple providers to provide the same services seems likely to result in overlapping services, inefficiencies, and a failure to leverage total asset size to get lower fees.  The same argument could be made for plans with multiple funds in the same asset class.  For example, if these investments were consolidated into one fund, they might become eligible to invest in cheaper institutional class shares.

                Set It and Forget It, because nobody is complaining. Just because you picked an appropriate menu years go does not mean that your menu is the best for participants today.  Fiduciaries need to monitor performance against benchmarks, and to be aware of new funds and alternatives to regular mutual funds, such as separate accounts and collective investment funds.  The U.S. Supreme Court in Tibble v. Edison affirmed that fiduciaries have an ongoing duty to monitor plan investments.

                Don’t Hold Regular Committee Meetings.  Running your business may be a priority, but business priorities shouldn’t cause frequent delays or cancellations of Committee meetings.  And you should have a committee, or at least specific employees assigned to oversee specific plan operations.  Meeting with your outside advisers on a regular basis facilitates monitoring of fees and investments, and also makes sure that the plan’s fiduciaries keep abreast of changes in the law.  Prepare agendas and keep written Minutes to record what is discussed and the reasons for decisions.

                The most important “don’t” may be don’t assign your plan or plans a low priority.  The big lesson of recent litigation is that fiduciaries always need to have the plans on their radar screens.