Roadmap for successful plan governance

Although retirement plan excessive fee cases remain an ongoing concern for plan sponsors, the recent jury trial victory for Yale in Vellali, et. al. v. Yale University, et. al. provides hope for plans with strong, prudent plan governance. Given the pace of new excessive fee lawsuits and the verdict in Yale, plan sponsors should review their plan governance procedures as soon as possible for compliance with the roadmap below.

In the Yale complaint, the class action plaintiffs alleged Yale University breached the fiduciary duties owed to its 403(b) plan participants and beneficiaries. The plaintiffs alleged Yale: 1) caused participants to overpay for recordkeeping services by failing to solicit bids, 2) failed to consolidate investment options leading to duplicative, overpriced, and confusing investment offerings, and 3) failed to monitor service provider charges and their investment and administrative fees.

In an unusual move, Yale did not settle and decided to take the case to a jury trial. At trial, Yale demonstrated to the jury that it maintained prudent governance processes (i.e., continuous, concerted efforts to renegotiate fees with providers, consolidated provider services, and closely monitored underperforming investments). In large part because of the evidence and testimony regarding plan governance, the jury found Yale proved it followed prudent processes for its recordkeeping and administrative services. Even though the jury found in some instances Yale caused participants to pay unreasonable administrative and investment fees, the jury declined to award damages given the 403(b) plan's prudent processes. Plaintiffs filed an appeal on July 25, 2023, but the value of Yale's prudent, documented processes is clear.

Although there is a split in the courts as to whether jury trials are permitted in ERISA excessive fee actions, the verdict in Yale underscores the importance of strong plan governance. It demonstrates plan sponsors do not always have to settle (which is often the goal of plaintiff-side firms bringing such cases) and that jury members can be sympathetic to large employers who run well-managed retirement plans. If employers are encouraged to proceed to trial rather than settle, this could have a dampening effect on the flood of excessive fee litigation.

Plan Governance Documents

Below is a roadmap for establishing successful retirement plan governance documentation to potentially avoid litigation and defend against claims for fiduciary breach. It is crucial that committee members follow these documents and understand their content.

• Create Key Documents:
  1. Resolutions by an ERISA fiduciary (usually the employer/plan sponsor) establishing a committee to oversee the plan and adoption of the committee charter.
  2. A charter outlining the committee's duties and powers (for example, the committee chairperson, signatory authority, sub-committees, etc.).
• Ensure the Committee Charter Establishes:
  1. Governance Team – The number of members required for the Committee, the appointed individuals and/or their job titles, subcommittees (if necessary), designation of a Committee Chair (if desired), and the Chair's authority should be addressed in the Charter. Avoid C-Suite executives as Committee members, where possible.
  2. Governance Mechanics – The Charter should describe several practical aspects of Committee responsibilities so that the process is consistent and defined. The Charter should address fiduciary authority and responsibilities, as well as procedures and requirements for: meeting frequency, minutes, attendance and quorum, virtual voting, conflict of interest and recusal, and Committee acceptances and resignations. The Charter should also provide that the Committee members are covered under fiduciary liability insurance (which is different and in addition to the required ERISA fidelity bond). Note that some insurance companies are changing deductibles and requiring proof of procedural prudence before providing fiduciary insurance bids.
• Create and Adopt Additional Policies:
  1. Investment Policy Statement – This policy is essential and should be a general guideline describing the plan's investment profile and broad approach to investing, but it does not need to contain information regarding specific investments. Further, it should outline the scope of authority and powers of the investment manager. This document should not contradict the Charter.
  2. Fiduciary Expense and Reimbursement Policy – This policy should address reimbursement procedures and limitations for reasonable plan expenses properly payable by the plan (as compared to impermissible settlor expenses).

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