The popular TV soap opera “As the World Turns” ran for 54 years. Given today’s continuously rising wave of benefits litigation, it seems increasingly likely that complex retirement plan litigation will run even longer. However, there is one “turn” in the litigation world that should be top of mind for advisors: increasingly, they are being brought into lawsuits in one way or another.
Because many advisors’ practices have evolved, they can be brought into lawsuits in many ways: in their role as a fiduciary advisor to the plan, due to their affiliates providing other services and/or products to the employer or the plan, or “informally” by their plan sponsor clients when litigation happens. Regardless of the way an advisor gets brought into the process, the costs, in terms of both time and money, can be significant.
So what are some basic things to consider? Here are four.
Paper Trail
First, it is always a given that advisors should be focused on their—and their organization’s—controls process that helps document their activities. These controls are essential when providing 3(21) fiduciary advice, and when 3(38) or other services and products may involve alleged “cross selling” of any kind. A solid procedural paper trail can be very protective of an advisor and their clients.
Insurance
Second, even with the best of processes, when litigation is filed we often wind up defending advisors, whether actually named in the litigation or not. Unsurprisingly, costs can escalate quickly.
As such, it is important that an advisor fully understand their insurance coverage. Key features of insurance coverage can include: (1) areas covered; (2) limitations on liability; and (3) panel counsel choices.
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Coverage can be provided under a broad-based errors and omissions coverage and/or under special policies. (For example, NAPA has developed a policy designed for advisors that has specific ERISA coverage with a panel comprised of multiple firms, including Groom, that is designed to address these concerns.)
While there is no one right or wrong way to buy insurance, understanding the distinctions between policies is essential. We have seen many instances in which these distinctions, if handled in the selection process, made the difference between having insurance coverage or not.
Contractual Provisions
Third, an advisor’s contract can have a significant impact on their role in litigation. Most importantly, as the services provided by an advisor (and any related parties) to a client change, it is helpful to carefully detail:
- which services are “fiduciary” in nature and which are not;
- the extent of the services; and
- any limitations on obligations.
The specific wording can make a significant difference if prohibited transactions might be involved.
Who is Responsible?
Fourth, given the rise of “blender” lawsuits—whether involving MEPs, PEOs, investment funds, or other plan features—where multiple service providers work on and advise plan fiduciaries, addressing who is responsible (and who is not) for each component of the plan services can help manage an advisor’s involvement and exposure in litigation.
Conclusion
Retirement plan litigation is now an ongoing fact of life. As the litigation landscape has shifted, increasingly, advisors are being pulled from the periphery of cases into the center of the process—whether as named defendants or in supporting their clients.
Litigation can be costly and burdensome. Advisors are well served to work internally and with their outside counsel on managing their process, insurance, and documentation before litigation happens. Doing so can result in significant benefits to an advisor and its clients.
David N. Levine is a principal with Groom Law Group, Chartered, in Washington, DC. This column appears in the latest issue of NAPA Net the Magazine.
