By Carol Buckmann
401(k) and 403b) plan litigation is not going away. If you are a plan fiduciary looking to avoid (or win) future lawsuits over fees and investments, there are lessons to be learned from recent decisions and settlements about the best ways to protect yourself in 2019. Here are some important takeaways from recent litigation activity:
1. Your Process Matters. New York University recently got a lawsuit dismissed by a district court because it provided evidence that it followed a prudent, though not perfect, process when selecting investments. If a case goes to trial, you will also need to demonstrate that you made prudent decisions in order to prevail.
2. Put it in Writing. It’s hard to prove that you followed a prudent process if you don’t write down what you did. People change jobs, die or may simply forget the details of what was done if there are not minutes explaining the reasons for decisions. Have clear written policies showing what you will consider when selecting or replacing investments and reviewing fees, and make sure to follow those policies.
3. Know and Review Your Options. Complaints have alleged that fiduciaries failed to consider alternatives to common investments, such as collective trusts as an alternative to mutual funds and stable value funds as alternatives to money market funds. Employees of investment giants such as Fidelity have sued because they claimed that these companies filled their plans with their own in-house investments even though better performing alternatives with lower fees were available. Even if you don’t select these options, you should investigate them and record the reasons for your decisions. Be especially careful about choosing your vendor’s proprietary funds without investigation. Better performing outside funds may be available on your platform.
4. Understand Target Date Funds. These are not fungible. They have different risk profiles, performance history, fees and glide paths. Don’t take the easy way out and automatically choose your vendor’s funds. In fact, it is a good idea to consider doing an rfp for target date funds. I wrote about that process in my column for 401ktv. https://401ktv.com/rfp-target-date-funds/
5. Benchmark Plan Fees. Be able to demonstrate that your fees are reasonable for plans of your size. But don’t compare apples to oranges. Select an appropriate peer group. Remember, though, that it is not a violation of ERISA to pay higher fees for better service, so long as the fees are reasonable.
6. Retain an Expert to Help You. Don’t be penny wise and pound foolish. If you don’t have internal investment expertise, hire an outside fiduciary to assist you. Insist on written reports of recommendations if the fiduciary is a co-adviser, and that the fiduciary attend committee meetings to answer questions and explain the recommendations.
7. Consult Outside Counsel When Necessary. See #6 above. Don’t try to guess what the law requires, and listen to counsel’s recommendations about best practices. While both advisers and ERISA counsel are available to provide fiduciary education, your ERISA counsel can give you a better handle on your legal responsibilities as ERISA fiduciaries.
8. Hold Regular Committee Meetings. The days when committees met once a year are over. Many committees now meet quarterly. These should be formal meetings where committee members sit down together with the plan adviser and, where appropriate, with ERISA counsel. A secretary should take formal minutes. Plan fiduciaries shouldn’t be meeting over the water cooler or making decisions by exchanging e-mails without face-to-face discussion in a misguided effort to save time.
9. Review Your Providers. At least once a year, review whether your vendors are performing in accordance with their proposals and their services agreements and survey your committee members to determine whether they are happy with the provider’s performance. Follow up to request changes or start a request for proposal (rfp) to find a new vendor if necessary.
10. Schedule Regular RFPs. Even if you are happy with your current providers, new rfps will give you the opportunity to renegotiate your services agreements and fees and will also let you know whether additional services are available in the marketplace.
There is no magic bullet that will shield you from participant complaints, but you might also consider having the plan sponsor obtain agreements to arbitrate all disputes and class action waivers from employees. However, be aware that at least one appeals court has refused to enforce agreements to arbitrate fiduciary breach claims. Arbitration also has pros and cons as an alternative to litigation, so don’t jump in without investigating.