In our prior post, we detailed some significant deficiencies in the study that Yale Law School Professor Ayers is planning to release and the far less threatening Yale official response.  But what steps, if any, should plan administrators take now to mitigate exposure, even if wrongly asserted, that might result from a breach of fiduciary duty action?  And what kind of opportunity does this present for other 401(k) sponsors who are not included in the study?  Recognizing that most 401(k) plan fiduciaries must determine, through proper prudence and process, that plan expenses are reasonable in view of the services provided to participants and that those services are necessary for the proper operation of the plan and in the best interests of the participants, now is a good time to revisit “reasonable and necessary.”

Many of our clients’ plan administrative committees avail themselves of the services of competent, independent investment advisors to assist them in performing the “reasonable and necessary”  analysis and in making these important decisions.  The advisors assist in understanding the 408(b)(2) disclosures, providing cost and service comparisons, negotiating fees, structuring and administering requests for proposal programs, confirming that there are no conflicts of interest with respect to the provisions of investment choices, and providing quarterly reports that assist the committees in fulfilling their duties.  Plan administrators that do not use the services of these independent advisors should conduct similar reviews themselves and be certain that they are capable of fulfilling their obligations in doing so.

Whether Professor Ayers follows through on his threats or not, 2013 is a good time to revisit your plan’s investment menu and its fee structure and to make certain that your plan is operating properly in view of what is “reasonable and necessary.”  It may also be a good time to review your plan terms and practices to be certain that they understand what is required of them under the plans and ERISA’s fiduciary duty rules so as to protect participants and to minimize grounds for fiduciary liability generally.  As a threshold matter, we note that the largest area for improvement in fiduciary governance generally tends to be  the clear identification of plan fiduciaries and the delineation of fiduciary functions and responsibilities in order to limit exposure.  In addition, it is very important that “plan documents” (e.g., the plan document, summary plan description (“SPD”), committee charters, resolutions, minutes and delegations) are consistent with each other and with actual practice.  Therefore, we generally recommend that plan sponsors take steps to (2) clearly identify fiduciaries, their duties and responsibilities; (2) confirm that any delegation of fiduciary functions duties is made pursuant to proper authority and procedures; (3) consistently and accurately document any such delegation of fiduciary responsibility; and (4) conduct fiduciary training to ensure that all appointed fiduciaries fully understand their roles and responsibilities.  In addition, we recommend:

  • Reviewing fiduciary insurance policies and exclusions to ensure proper coverage
  • Establishing a thoughtful fiduciary decision-making process
  • Documenting the process and actions used to carry out fiduciary responsibilities
  • Hiring service providers to perform certain fiduciary or administrative tasks, as deemed necessary or appropriate
  • Implementing, following and documenting a regular, formal review of service providers’ scope of services, quality of services, performance, fees/costs, etc.
  • Using experts as appropriate (but evaluating their input pursuant to fiduciary process)
  • Identifying provider’s direct and indirect compensation and obtain ERISA 408(b)(2) disclosure
  • Evaluating fees and services relative to comparable providers
  • Disclosing fees to participants as required by law
  • Reviewing and revising plan documents (e.g., plan, SPD, investment policy, trust, committee charters, delegations, etc.) to be consistent with each other and with actual practice

Not all 401(k) plans are alike and not all fiduciary decisions with respect to them mirror image one another.  It is, therefore, important to evaluate your plan based on the factors that fulfill your duties to the plan, its participants, and their beneficiaries.