Art by Joseph CiardielloHardly a day goes by when we don’t see a new class action lawsuit brought against plan sponsors and their advisers—plan fiduciaries—regarding the management and administration of retirement plans. Making things worse, plaintiffs’ theories used to claim that plan fiduciaries violated duties to the plan have become wide-ranging and complex. Given the frequency of such suits and the significant potential liability relating to claims made under the Employee Retirement Income Security Act (ERISA), plan fiduciaries should familiarize themselves with the types of claims raised against plan fiduciaries and get an understanding of how courts have analyzed them.
This article describes some of the notable allegations taken from the seminal cases in the retirement space and the key points that plan fiduciaries should take from those cases.
As those who read this column regularly know, claims brought against plan fiduciaries often involve the cost of administering and managing the plan. For example, in Tussey v. ABB, the court determined that the fiduciaries failed to leverage the size of their plans, to negotiate a reduction in recordkeeping fees and should have avoided subsidizing the cost of non-plan-related recordkeeping services. In response to these types of claims, plan fiduciaries should understand the fee structure and the amount paid to plan recordkeepers, regularly benchmark fees with applicable peer groups and monitor fees on a regular basis. Plan fiduciaries should ensure that their plan’s fees are evaluated apart from any services received by the plan sponsor and that the plan is not used to reduce the sponsor’s cost.
Importantly, however, a plaintiff firm’s argument that relies on “the payment of revenue sharing is per se problematic” have generally not been successful legally. For example, in Renfro v. Unisys Corp., the court dismissed claims that paying for recordkeeping fees through revenue sharing was per se imprudent. The court did, however, find that revenue-sharing arrangements need to be adequately disclosed. As a result, plan fiduciaries should: 1) understand fees paid to recordkeepers and other plan service providers; 2) review fees paid to plan service providers on a regular basis; and 3) revisit disclosures to ensure that compensation paid is accurately disclosed.
Plaintiffs also regularly focus claims on the selection of the plan’s investment options. For instance, in Tibble v. Edison, the appellate court ruled in favor of the plaintiffs and found that the plan fiduciaries breached their duties to the plan when investing in retail share classes and failed to consider the less expensive institutional shares. To avoid such charges, plan fiduciaries should: 1) regularly monitor the expenses paid by the plan to ensure that the fees are competitive with similarly situated plans, and 2) monitor and review the share classes for which the plan qualifies.
As would be expected, several recent court decisions considering the selection of investment options have focused on cost. For example, the court in Hecker v. Deere held that there is no duty to “scour the market” for investment options with the lowest fees. Courts have also decided that, not unexpectedly, ERISA does not preclude the inclusion of mutual funds on plan investment menus. That being said, we think it makes good sense for plan fiduciaries to consider the fees and expenses of all available investment options when investing the assets of an ERISA-covered defined contribution (DC) plan.
Plan fiduciaries should aim to avoid fiduciary liability under ERISA by taking the following steps:
• Ensure there is a documented, prudent process in place for the consideration, selection, evaluation and monitoring of the plan’s investments;
• Compare the costs of all investment options available to the plan;
• Periodically, survey the marketplace and document any efforts to control recordkeeping or other plan costs;
• Ensure that each plan service provider’s compensation
is properly disclosed;
• Periodically evaluate the plan, its investments, the plan menu and service providers as to performance and cost; and
• Explore appropriate fiduciary liability insurance and fidelity bond coverage to protect the plan fiduciaries and members of investment committees from liability.
Class action litigation has had a profound effect on the delivery of retirement investments and services to plans, in terms of both cost and anxiety. The cases filed and decided over the past few years have taught us several valuable lessons.
Stephen Saxon is a partner with Groom Law Group Chartered, headquartered in Washington, D.C. George Sepsakos, an associate in Groom’s fiduciary responsibility group, contributed to this article.
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