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Take that target off my back: A guide to avoiding 401(k) litigation
December 12, 2016 at 1:57 PM

Businessman with target on backIn an earlier post, I discussed the spread of 401(k) litigation and the fact that smaller plans were becoming targets for aggressive litigators. As the pool of large plans diminishes and the litigation theories become well-known, it is inevitable that the volume of 401(k) litigation will expand. Fortunately, most plan sponsors can avoid 401(k) litigation by taking a few obvious steps. Here are some suggestions.

Identify and monitor fees. The most frequent claim in 401(k) litigation is that the plan fiduciaries allowed the plan to pay excessive fees for investments and administration. A plan fiduciary, whether a sponsor or a trustee, has a duty to identify fees being paid by the plan or from plan assets. Once identified, those fees and expenses need to be compared against other providers in the 401(k) marketplace. Benchmarking services are available to compare fees. A service provider does not need to be the cheapest. However, fees must be reasonable based on the services being provided.

Fiduciaries should document their review of fees charged by service providers and investment funds. Documentation should demonstrate the process undertaken in reviewing fees, including an analysis of fees charged, the services received and the benchmarking of those fees. Selection of the correct share class of a particular mutual fund is important, as different share classes have different expense ratios. This review process should be regular and ongoing.

Monitor and review investment performance. A second basis for claims against fiduciaries is poor performance by plan investments. This can be avoided if plan fiduciaries regularly monitor, and when necessary, replace poorly performing plan investments.  

The first step to avoid issues in this area is for plan fiduciaries to adopt an investment policy statement (IPS) for the plan that sets forth the types of investments to be offered and the criteria for retaining or replacing specific investment vehicles. Once the IPS is in place, it is important that it be followed.

It is recommended that fiduciaries engage third-party investment experts to review the performance of funds offered by the plan and the fees charged by those funds. Special scrutiny should be undertaken when using proprietary funds offered by a bundled provider. Funds that are consistently underperforming or that do not meet the criteria set forth in the IPS should be replaced immediately.

Protect your fiduciaries. A couple of additional simple steps should be taken to protect the plan sponsor and individuals serving as plan fiduciaries. The first is to conduct a fiduciary audit of plan practices to ensure that the plan operations are being undertaken in full compliance with ERISA. A second step is to ensure that there is adequate fiduciary liability insurance to protect plan fiduciaries in the event that a claim is made with respect to plan operations and fiduciary responsibility. By taking these simple steps, plan fiduciaries are less likely to be a target of litigation and, if sued, will be in a better position to defend that litigation.

Tags: 401(k), ERISA
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