Just two months into 2020, the incidence of ERISA fiduciary breach lawsuits shows little sign of slowing down. Over the past three months alone, more than half a dozen new class action lawsuits have been filed, targeting the sponsors of both large and small plans. The plaintiffs in these cases have made various allegations – questioning plan fiduciaries’ retention of high-cost mutual fund share classes, poor performance of investments, approval of excessive recordkeeping and administrative fees, etc.
While the claims raised by plaintiffs in these new cases are relatively “par for the course” when it comes to the recent spate of fiduciary litigation, they serve as a (fairly constant) reminder to plan fiduciaries of their ongoing responsibility for the selection and monitoring of plan service providers and investment options. And, although there’s no perfect protection from the ever-present specter of litigation, there are actions plan fiduciaries can take to ensure their decisions won’t lead to costly lawsuits.
- Ask questions. ERISA requires plan fiduciaries to act solely in the interests of plan participants and beneficiaries and for the purpose of providing them with benefits and defraying the reasonable costs of administering the plan. Plan fiduciaries must act with the “care, skill, prudence, and diligence under the circumstances” that a prudent person acting in a like position and familiar with the facts would use. When selecting plan investments and service providers, prudent people should ask questions – lots of them.
For example, when selecting a service provider (such as investment advisors, third party administrators, etc.), fiduciaries should understand the services to be offered to participants and what those services will cost. Fiduciaries should be clear on what expenses may be paid for directly by participants (e.g. plan loan processing fees) and what costs will be paid for by the plan itself (e.g. general administrative fees, special processing fees, etc.). Benchmarking the cost of services a potential provider will offer to participants against those of comparable vendors can help plan fiduciaries ensure they are getting the “best bang for the buck” (and for the bucks of plan participants).
Fiduciaries should be asking similar questions when selecting investment options for the plan. For instance, what are the expense ratios of the various investment options to be offered to plan participants? Are any of the options subject to 12b-1 fees or other similar distribution fees? Does the plan qualify for a lower-cost share class for any mutual fund option under consideration? Is the plan’s overall investment line-up suitable for the plan’s participants – that is, does it offer enough choice to participants (or, perhaps worse, too much?)?
- Document the decision. Fiduciaries should document the process used to review the fees charged and services offered by the service providers they engage, as well as the fees charged for the investment options they select. They should also document the basis for their decisions with respect to their ultimate choices. This may include describing their decision-making process in the plan’s administrative or investment committee meeting minutes or retaining the reports of consultants the fiduciaries engage to assist them in the process.
Such documentation may be especially important if the fiduciaries select more expensive service providers or investment options for the plan. While plan fiduciaries aren’t required to pick the lowest-cost provider/investment, the fees paid for the selected services/investment must nevertheless be reasonable. Documenting the plan fiduciaries’ rationale for selecting a higher-cost service provider or investment option, and why it was in the best interest of the plan and its participants to do so, is essential.
- Keep watching. Unfortunately, once plan fiduciaries have gone through the process to select a service provider or investment option, their job isn’t done. They must continue to monitor the performance of those service providers and investment options.
For service providers, this will include reviewing any reports prepared by the providers that detail the services provided. Fiduciaries should ensure that the services are being performed in a manner, and at a cost, consistent with the agreements between the parties. Fiduciaries should also consider any participant comments or complaints about the service provider. If there are performance issues, the fiduciaries will need to decide whether they can be addressed by the service provider or whether they are significant enough to warrant terminating the current provider and engaging a new one.
Plan fiduciaries must regularly monitor plan investment options to ensure they are performing as planned. If not, they should take steps to replace those performing poorly. Fiduciaries should also monitor any changes in the costs of the investment options offered by the plan. Benchmarking the performance and fees of the plan’s current investment options against other similar funds or assets will likely be necessary. In most cases, plan fiduciaries will need to retain an investment advisor/expert to help them with this process. (That investment advisor/expert should be engaged by undertaking an appropriate service provider selection process, as discussed above.)
An investment advisor/expert can assist the plan fiduciaries in creating and adopting an investment policy for the plan. That policy should describe the types of investments plan participants will be offered, their relative costs, and the criteria to be used to review their performance and determine whether (and when) they should be retained or replaced.
- Education is key. To properly fulfill their obligations to the plan, fiduciaries need to understand what their role entails. Periodic fiduciary training that describes ERISA’s fiduciary requirements and the steps plan fiduciaries must take to satisfy those requirements is a good start. The plan’s legal counsel may be able to assist with such training. Fiduciaries should have a general understanding of the plan’s terms to ensure the plan is being administered in compliance with them and with the requirements of ERISA. Conducting periodic fiduciary audits of plan practices will help ensure that compliance.
Although there’s no magic trick for avoiding ERISA fiduciary class action litigation, by taking the steps described above, plan fiduciaries can reduce the likelihood of one day having to defend their actions in court.