The Center for Retirement Research at Boston College recently released a study outlining the major causes of 401(k) lawsuits. In particular, the study focuses on the fact that these types of lawsuits often hinge on whether the plan fiduciary was following a “prudent” process and how one would define a process as prudent. With most companies now offering 401(k) plans as their primary retirement offering, it’s wise to pay attention to the major findings and engage ERISA counsel to guide implementation of a fiduciary legal compliance paradigm to mitigate exposure to these costly lawsuits.
Major Causes of 401(k) Lawsuits
- Excessive Plan Fees: One of the primary drivers leading to a lowering of plan investment and administration fees is litigation regarding what are viewed as excessive fees. These fees are charged by the investment professionals managing the plan assets, outside administrators helping the business handle the paperwork and overhead associated with running the plan. Courts have maintained that these fees, in proportion to the assets being managed, do not always have to be the lowest available options. Nevertheless, it is important that these fees be consistently (i.e., annually) benchmarked against other, similar plans.
- Poor Investment Options: Fiduciaries are expected to demonstrate care when selecting the investment options for the retirement plan. They are expected to meet the “prudent man” standard designed to minimize the risk of large losses. This is where the prudent decision-making process comes into play and many lawsuits hinge on whether this process was followed when selecting the investment options for the plan.
- Self-Dealing: This should be an obvious problem for plan fiduciaries. Nevertheless, plans, and plan administrators, sometimes act in their own best interest rather than in the best interest of the plan participants. In many cases, this is because an employer elected to offer their own investment fund to the plan rather than choosing an option that had lower fees or better performance. Ongoing ERISA counsel can direct fiduciaries on common pitfalls and mitigate exposure to claims of fiduciary self-dealing.
What is a Prudent Process?
Many of these 401(k) lawsuits turn on whether the plan followed a prudent process when making the decisions on how to invest and what fees to spend. While a prudent man standard is applied to decisions and processes, little other direction is given via regulation and plan documents and fiduciaries are left to determine what, exactly, this entails. In many cases, the consequence of 401(k) litigation have led plans to include more passive investment options such as passive mutual funds. While many courts do not find the fees associated with actively managed plans excessive, fiduciaries are choosing passive funds in an effort to minimize their risk.
One improvement that has come from these types of lawsuits is plan administrators offering greater transparency on their fees, how they break down, and how they compare to other similarly-performing 401(k) plans. When the participant and plan sponsor know what they are paying for and that the fee is reasonable, the hope is that the plan is less likely to face litigation.