Avoid 401(k) Lawsuits by Being Proactive
posted Oct 12, 2017 by Anthony Mangiarelli, CPA in the Business Blog
Sponsoring a 401(k) retirement plan shows your concern for the long-term financial well-being of your employees. But your best intentions won’t prevent employees from taking you to court if they believe you’ve neglected your duty to manage the plan prudently and economically.
In recent years, the biggest 401(k) legal battleground has revolved around the competitiveness of management fees built into annual investment fund charges. It’s an important issue from the perspective of your employees, because seemingly small differences in these charges can add up to a large sum over the years.
Supreme Court Weighs In
A recent U.S. Supreme Court case — Tibble v. Edison International — establishes today’s basic legal standards on this topic. In that case, which took a decade to resolve, plan participants faulted the employer for failing to switch plan assets from retail-priced mutual funds to lower-cost institutionally priced versions when the opportunity arose. The higher-priced funds enabled Edison to “revenue share” with the plan’s recordkeeper, which in turn subsidized the fees that Edison was paying. That was found to be a fiduciary breach.
Another key issue was whether a six-year statute of limitations for fiduciary claims could block the lawsuit. The Court ruled that it didn’t because a fiduciary’s obligations are ongoing, not a one-time act. The Court stated that the task of fiduciaries is “to monitor trust investments and remove imprudent ones” and to “systematically consider all the investments of the trust at regular intervals to ensure that they are appropriate.” Those obligations aren’t limited to assessing fees.
Consider an IPS
All retirement plan sponsors should consider having an “investment policy statement” (IPS). An IPS lays down basic guidelines for 1) the kinds of securities the plan will invest in, and 2) the general proportions for each type of security. An IPS will also describe how funds manage risk and respond to various market and economic environments.
After you and your plan investment team create the IPS, monitor whether investment funds are in compliance with the statement. You should also revisit the IPS itself every few years to be sure it’s still appropriate. Additionally, an independent investment advisor should be retained to assist with monitoring fund performance and fee benchmarking analysis on a regular basis.
Of course, taking these steps won’t guarantee that plan investments will always perform well. But if you create an IPS and investments underperform, employees may be dissuaded from filing a lawsuit. It’s important to note that ERISA emphasizes “procedural prudence,” not outcomes. For more information on protecting your 401(k) plan from employee claims, contact us.