In a recent article published by NAPA titled “Litigation Landscape: Targeting TDFs, ‘Meaningful’ Markers and Pre-Litigation Letter Campaigns,” authors Bonnie Treichel and Nevin Adams both highlight the importance of proper documentation by plan sponsors to mitigate litigation risk.
Many other ERISA experts and attorneys have echoed their advice over the years, but apparently, many plan sponsors and their advisors are not paying attention to the message; otherwise, we might see more cases dismissed. Although not the only one, Winston Churchill once wrote, “Those that fail to learn from history are doomed to repeat it.” 
If the continued barrage of litigation has taught us anything, it's that proper documentation is imperative to mitigate the cost of litigation. Said another way, the industry needs strong leadership from advisors that communicate the message that plan sponsors have a choice to “pay now or pay more later”!
Strong leadership from advisors is imperative to turning this litigation frenzy around. Plan sponsors that work directly with a recordkeeper or rely exclusively on their ERISA legal counsel are making a drastic mistake by eliminating an industry insider with experience, knowledge, and expertise that cost pennies now compared to the cost of defense and the common multi-million-dollar settlement agreements.
The selection of an advisor should be evaluated and documented through a formal request for proposal (RFP) process. Although many plan sponsors select an advisor based on their ability to build a relationship of trust, that trust must be verified. Verification comes by understanding the advisor’s knowledge, experience, skills, expertise, infrastructure for support, services provided, and vendor relationships that align with the plan sponsor’s needs.
While there is a history of conflicts of interest among advisors and vendors associated with compensation structures, the fiduciary breach litigation activity over the past 15 years has eliminated that as a blatant problem.
However, vendors have rewarded advisors with large blocks of business on their books with better pricing, custom service agreements, consistent and dedicated internal support staff, and access to lower-priced investments, all of which benefit the participants and lower the risk of litigation for the plan sponsor. Of course, these changes support the argument that recordkeeping and advisors’ services are not commodities and that price alone cannot provide a meaningful benchmark.
This concept was addressed by Treichel and Adams that “a growing number of courts are looking for a “meaningful” benchmark, make sure that you understand (and document) not only the fees, but the service(s) provided for those fees in recurring benchmarking exercises (think: annually or semi-annually).”
Based on our database, it is clear there are distinct differences between recordkeeper services and plans of all sizes that justify the cost difference. Still, this message isn’t being communicated and documented well. Within our own PlanTools’ benchmarking database, we find too many reports being delivered that benchmark costs by service category, i.e., advisor, custody/trust, recordkeeper/TPA, and investment management, but lack details on the services provided even though the functionality exists to address specific services.
If we are going to drive a stake in the vampire’s heart that is sucking capital from corporate coffers for ERISA defense, it will start with the plan sponsor hiring an advisor to conduct a benchmarking analysis annually and an RFP tri-annually. Both efforts should detail the cost and services rendered with emphasis on the services that uniquely address the plan sponsor’s objectives.
Furthermore, an annual score should be assigned to the subjective assessment of each service provider. All too often, there is a lack of documentation addressing the subjective issues that are an important part to hiring and monitoring a service provider i.e., recordkeepers, advisors, auditors, ERISA attorneys, etc.
What subjective matters should be covered, you might ask? At a minimum, a plan sponsor should rate a service provider on these subjective issues:
- Have all services outlined in the agreement been delivered?
- Is the service promised necessary for the operation of the plan?
- Have those services been delivered on time?
- Have those services been delivered accurately?
- Have those services been delivered professionally?
- Has the service provider met our expectations, and are we satisfied?
These subjective issues are a basis for a quality measurement of the service provider and their services. The subjective assessment adds another important metric to fee benchmarking that must be evaluated in light of the number, type, and complexity of services retained compared to similar-sized plans. Evaluating and documenting objective and subjective metrics will assist the responsible plan fiduciary in raising a strong defense against a plaintiff’s attack that fees are unreasonable.
Another strategy to combine with the above recommendation is a fee-sharing arrangement between the plan and participants. If a plan sponsor truly wants to remove their plan from the crosshairs of the plaintiff bar, do not pay all of the plan fees from participant accounts.
Instead, structure a fee-sharing arrangement where the plan participants pay half, and half is paid from the corporate account. Remember, litigation damages are based on the impact on plan assets, not corporate assets. By paying part of the fee directly from corporate assets, you reduce potential damages, demonstrate the employer has skin in the game (why would the employer willingly pay excessive fees), and reduce any potential damage awards.
Conclusion
The plaintiff bar has too much incentive to file class action lawsuits against plan sponsors. Plan sponsors need to learn from history and avoid repeating past mistakes. This starts with retaining an advisor that provides meaningful services to mitigate risk. Meaningful services go beyond surveys that Courts have rejected.
Instead, it requires a knowledgeable advisor who can assist with the subjective assessment, leverage organic data from live plans, and offer a professional opinion a plan sponsor can rely on. Clearly, the advisor is in the best position to provide annual benchmarking of fees for services rendered.
Finally, the advisor may provide access to better-priced services and investment options, as well as a better service menu and service personnel with the plan sponsor’s recordkeeper of choice due to the advisor’s volume of business with that recordkeeper. All of this justifies the retention of an advisor and the fee they charge.
David Witz, AIF, GFS, CPFA, BCF, is the Chief Executive Officer of risk management technology platform PlanTools.
