In a year full of challenges for plans and plan sponsors alike, we’ve seen a spate of litigation against retirement programs like none in recent memory. So, what’s a plan fiduciary to do?
At times it seems that every plan in American with more than $1 billion in assets has fallen short of at least what the plaintiffs’ bar has sought to establish as prudent. They[i] continue to make the arguments that passive investments are inherently better than active, that anything less than the lowest priced available share class is imprudent, that RFPs not only must be conducted, but must be conducted every three years, that asset-based fees are an inappropriate recompense for recording services—they’ve even gone so far as to state—unequivocally—what a reasonable fee for those recordkeeping services is. All this as though what constitutes reasonable can be determined solely by the size of a plan in terms of assets or participants.
Taken all the way to trial, these cases often come down in favor of the defendants—however, most seem to settle prior to that (a fair number immediately prior to that). It’s hard from this vantage point to know how many of those are a function of merit, and how many simply a determination that the costs of proceeding simply aren’t worth the risk. Regardless, settlements always seem to carry a stigma of “loss” for the defendants—and, however modest (and most are anything but that), they provide additional monetary fuel for the next round of litigation.
So, what should plan fiduciaries do? Here are five suggestions drawn from the experience of recent litigants.
Make sure you have a committee—one that is qualified and engaged.
There are plenty of times where the “qualifications” of a workforce committee are suspect, motivated by popularity, organizational reporting lines, or sometimes simple availability. Those should not be the criteria for your plan committee.
ERISA only requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA does not require that you make those decisions by yourself—and, in fact, requires that, if you lack the requisite expertise, you enlist the support of those who do have it.
It’s important to remember that the responsibility, and the prudent expert standard to which those responsibilities must be held applies uniformly—and it has been called “the highest known to the law.” In forming and conducting the committee it’s imperative not only that the members be selected wisely, but that they be informed and engaged so that they can adequately and fully discharge those responsibilities.
All fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, whether you are a member of that committee—or are responsible for choosing those who are—it’s a good idea to know who your co-fiduciaries are—and to keep an eye on what they do, and are permitted to do.
And lest it be overlooked, those in a position to control plan assets—as most committees are—are considered ERISA fiduciaries—and as an ERISA fiduciary, your liability is personal. Oh, and that includes those who have the power to appoint ERISA fiduciaries.
Have (regular) committee meetings.
It’s been said that committees are groups that take minutes and waste hours. However, it’s worth remembering that a relatively recent court decision (Wildman v. Am. Century Servs.) in favor of the plan committee defendants explained that that committee met regularly three times a year, and had “special meetings if something arose that needed to be discussed before the regularly scheduled meetings.” Moreover, the defendants testified that those meetings “were productive and lasted as long as was needed to fully address each issue on the agenda. On average, the meetings lasted an hour to an hour and a half.”
The best way to ensure a prudent process—is to have an established committee structure and process that supports it. Like exercise, it’s going to be less painful—and more productive—if it’s regular.
Document those meetings—particularly decisions made or deferred.
There is an old ERISA adage that “prudence is process.” However, an updated version of that adage might be “prudence is process—but only if you can prove it.” To that end, a written record of the activities of the plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations.
More significantly, those minutes can provide committee members—both past and future—with a sense of the environment at the time decisions were made, the alternatives presented, and the rationale offered for each, as well as what those decisions were. They also can be an invaluable tool in reassessing those decisions at the appropriate time and making adjustments as warranted—properly documented, of course.
Despite the onslaught of litigation, courts—given the option of weighing in that settlement precludes—have generally been reliably consistent in affording plan fiduciaries the benefit of the doubt when it comes to the review of plan investments—so long as there is a documented review and consideration of those investments.
Offer—and participate in—fiduciary training.
The American Century plan in the Wildman case cited above provided “training and information about their fiduciary duties, including a ‘Fiduciary Toolkit,’ which outlined their duties as fiduciaries, as well as a summary plan document, and articles regarding fiduciary duties in general.” That kit included a copy of the current Investment Policy Statement, and the court noted that “the Committee members read these materials and took their responsibilities as fiduciaries seriously.”
Worst case, making the training available will serve as proof of your (and your committee members) commitment to the process, and an appreciation for those responsibilities.
Monitor social media.
Like it or not, social media has become a vital aspect of the plaintiffs’ bar’s outreach to potential plaintiffs. It’s cheap, it’s easy and it seems to be effective. Indeed, it’s been said that a 401(k) plan—with thousands of similarly positioned (and potentially affected) individuals—is a class action attorney’s “dream.”
Seeing the activity there may not keep a lawsuit from happening—but there’s surely value in knowing ahead of time that your workforce is being “trolled”… Though these days if you have a multi-billion dollar plan, you can pretty much count on that.
It’s said that the best defense is a good offense. But ultimately, plan fiduciaries should know that while it’s never too late to do the right thing(s), doing those “right” thing(s) won’t necessarily provide 100% insulation against suit. After all, in more than one case where plan design changes have been implemented, the plaintiffs’ counsel has pointed to those changes as tantamount to an admission of guilt, an awareness that there were design flaws in the plan.
On the other hand, what better proof of a prudent process than one that considers—and implements—changes for the good of retirement plan participants and beneficiaries?
And isn’t that the best “defense” of all?
[i]The plaintiffs’ bar has not only lifted the arguments, but in a couple of cases has literally lifted the text from suits filed by other firms. There is apparently no plagiarism penalty in litigation, or perhaps “imitation” truly is the sincerest form of flattery. Regardless, what has contributed greatly to the sheer volume of litigation has been not only the expanded engagement of ERISA litigation notables like Nichols Kaster PLLP, but the entrance of new litigants. Indeed, it’s gotten so common that P&C insurers are not only pressing on the subject of ERISA litigation, but going so far as to call out specific litigation firms in their questionnaires regarding future coverage.
