By Allison Brecher, General Counsel, Vestwell
More than 100 lawsuits were filed in the last two years against plan sponsors and advisors, claiming that fees charged to them by their 401(k) plans were excessive. This litigation has resulted in hundreds of millions of dollars in settlements, significant reputational damage, and countless hours spent on defending litigation instead of servicing clients. Worse yet, when the stock market declines, we can expect more filings like these. In addition to litigation over failures to make reasonable decisions for plans, the Department of Labor restored over $1.6 billion to benefit plans to correct each plan sponsors’ failure to follow its own internal procedures.
Fortunately, many of these types of claims are preventable. With a little time and preparation, advisors, plan sponsors, and other fiduciaries can take steps to minimize their risk and even eliminate it almost completely.
Create internal policies and follow them.
Every plan sponsor and fiduciary should have a written guide – even if it’s just one page – that lists who the plan service providers are, what each one does, who makes decisions for the plan about investments and other plan features, and how often those get decisions reviewed. Courts have repeatedly dismissed claims where the plan sponsors provided evidence that their plan has internal procedures about plan-related decisions and that they were followed. There are many free online resources to help sponsors conduct fiduciary training, vet their service providers, and assess conflicts of interest that might impair their obligation to serve their participants’ best interests. Don’t wait for litigation to jump into action.
Benchmark the plan’s costs to make sure they are reasonable.
One of the most often litigated claims against plan sponsors and advisors is that they permitted the plan to incur unreasonably high costs. The regulations are clear that the plan does not need to engage the least expensive provider and cost is not the only criteria to determine whether a provider’s or investment’s fees are “reasonable.” The plan sponsor or advisor should take stock of each service provider’s services, evaluate them, and document the review of them.
Identify and disclose all actual or potential conflicts of interest.
Service providers should disclose their conflicts of interest to the plan sponsor so that the sponsor can make an informed decision that aligns with their participants’ best interests. Sadly, not all providers do. If the same company that serves as the plan’s recordkeeper is also providing the investment options available to plan sponsors or receiving other indirect compensation from the investments offered by the plan, there may be a conflict of interest. Conflicts can only be managed if they are disclosed.
Give participants clear and complete information about the plan.
It is astonishing how many claims could have been avoided had plan fiduciaries been more transparent in giving plan participants information. This could be as simple as giving them materials about joining the plan and how to invest through an email blast or mailing. Tell participants in “plain English” what they need to know about the investment options, eligibility requirements, employer match, and other basic plan features.
Complacency about proper retirement plan management is a significant business risk, but there are easy ways to manage it. Advisors and plan fiduciaries can use these lessons of litigation to help plan sponsors ensure they are properly setting up their plans and keep them out of trouble.