Seems like every week – and sometimes more than once a week – there’s a new suit filed against plan fiduciaries. What do NAPA-Net readers think it all means to retirement plans, and plan designs?
While acknowledging that the causes, realities, and outcomes of ERISA litigation are varied (to say the least), asked to comment on ERISA litigation, reader poll respondents said it was (more than one answer permitted):
62% - a big payday for the lawyers
48% - an opportunity to educate plan fiduciaries on their responsibilities
38% - a wake-up call for plan fiduciaries
24% - a valuable alert to bad behaviors by plan fiduciaries
10% - a waste of time and money
A quarter characterized it as “all of the above.” One reader commented: “Mainly a big waste of time and payday for the lawyers.”
That said, one reader pushed back, stating that “I'm not sure it’s as huge a payday for lawyers as one might think. If you look at Tussey v. ABB, the lawyer fees amounted to $600/hour. That’s not exactly a huge payout, especially when you look at what ABB spent defending their bad behavior.”
“Plan sponsors are beginning to realize that many service providers that they have hired do not have much or any incentive to police themselves from an investment, service, expense, and value standpoint if doing so could result in a decrease of revenue or an increased effort to support. The lack of “renewal” dates associated with other insurance based benefit plans, seems to feed into the apathy model of “no news is good news”... which is not a good long-term strategy for anything, specifically a horrible strategy where stewardship implications are at stake.”
“The vast majority of cases focus on the expense ratios of the funds. Some even openly state, “the Plan didn’t offer enough passive strategies. Since when has indexing become an ERISA standard?”
“I think fiduciaries aren’t fully aware of their responsibilities and assume because they have an advisor they are safe from claims,” commented another.
“It should be a wake up call to plan fiduciaries, but I’d say that's not the case; particularly in the micro and small markets,” explained another.
In fact, overall this week’s respondents seemed to find more opportunity than not in the litigation. Asked to narrow their assessment to a single area:
45% - an opportunity to educate plan fiduciaries on their responsibilities
35% - big payday for the lawyers – the participants, not so much
The remaining 20% split between a wake-up call for plan fiduciaries, a valuable alert to bad behaviors, and a waste of time and money (the latter drew the backing of just 3%).
“Finally got plan sponsors to pay attention and provided a justification for why we insisted on meeting to review the 401(k),” noted one reader. “Fiduciaries may need to work with plan professionals a little more closely and follow their policies and procedures,” commented another. “I’d say these lawsuits are examples that can be provided to educate fiduciaries; many of whom are still blind to their plan’s fees and aren’t even aware what a 408(b)2 notice is,” explained another.
“The impact will be that fewer and fewer smaller employers will want to get embroiled in the drama and possible lawsuit associated with DC plan,” cautioned another. “I don’t even discuss the possibility with my client anymore. It is not worth the possible career ending lawsuit that will come with the insanity that is becoming this industry.”
Sponsor Recommendations
Speaking of education opportunities, we asked readers what changes, if any, they had recommended to plan sponsor clients/prospects as a result of (or perhaps inspired by) the litigation. They responded:
45% - changes in share classes
45% - documentation of committee meetings
35% - conducting an RFP
24% - frequency of committee meetings
7% - shift from active to passive management
7% - change in recordkeepers
7% - accelerating the timetable for an RFP
3% - changes in committee personnel
A number of readers chimed in along the lines of the reader who responded, “But in truth these are items that I recommended anyway; these developments just give them more force.”
Or, as another noted, “the only thing the litigation has done for us is to confirm that all the things we do for our clients is best practices. For 20 years we have been monitoring share classes, using passive and active investments, conducted RFPs, created due diligence processes, etc. Frankly, we’ve been surprised that all of the large plan sponsors haven't been doing these things.”
Advisor Recommendations
Among the other recommendations put forth by readers were:
Stripping out all revenue sharing and being more transparent.
Documenting our understanding of revenue sharing and ensuring that any revenue is rebated back to the participant that generated the revenue. In many cases, the zero revenue (R6, etc.) is not the most efficient share class. Due to pricing anomalies, certain fund families will have share classes that provide revenue, when netted out, result in a lower expense to the participant.
Reminder that we do things the right way so they don't have to worry...plus plans of their size usually don’t end up in litigation because there's not enough money to be made by the lawyers.
When choosing funds, low expense ratios (moronically) seem to be even more important than performance. Stay away from proprietary funds regardless of their cost and/or performance.
Periodic review of all providers including their advisor.
To not be afraid to take the time and ask questions.
Most large employers already have best practices in place and have perhaps, stepped it up a bit due to the lawsuits by reviewing their committee oversight. Small employers, where I mostly consult, do not employ any of the best practices. They lack the resources and are frankly focused on making their business successful.
Because we had already recommended to all of our Plan Sponsor clients that they institute all (or most) of the above, and they had wholeheartedly embraced the entire process, there was no need for us to have them change any of their procedures.
Plan Sponsor Concerns
As for which area they found plan sponsors to be most concerned about:
32% - changes in share class(es)
14% - documentation of committee meetings
7% - changes in recordkeepers
4% - shift to passive from active management
3% - conducting an RFP
Other things plan sponsors are concerned about include:
All of it. They just want to know what, if anything, they’re doing ‘wrong’ and how to fix it.
Reviewing fees.
What was their risk of being sued.
Transparency in fees and clarity in communication to participants.
Most understand these are larger fish and don't seem worried given our level of expertise, advice, and involvement as TPA and advisor.
Follow plan policies and procedures.
They are concerned that the reasonable fee test is being replaced with the lowest fee as the only acceptable fee. Using retrospect, there is always a better fund that can be found...while plans cannot predict the future but can be litigated against by applying the past (which is always known). If the government wants to have small businesses to start up plans...they must protect them from this type of litigation.
The one item that plan sponsors are most aware of are the investment fees. It is unfortunate, that the small employers really cannot do much about share classes as they do not have the assets and therefore, little purchasing power.
And then, there was the respondent with a sense of ironic humor:“Plan Sponsor: ‘Plans are being sued?!’”
And then, not that we’re trying to give the plaintiffs’ bar any ideas, we asked readers what they thought the next big focus of ERISA litigation would be. Here’s a sampling:
Target date fund performance
Health plan fees
Revenue sharing. I don’t think fund companies should have different revenue sharing between providers.
Managed Accounts oversight
Process for selection and monitoring of appropriate target date funds especially if they are proprietary to the recordkeeper.
Health plans!!!!!!
Proprietary funds (of a recordkeeper) when the markets turn
Fixed Accounts/Money Markets, HSAs
Self directed brokerage accounts. Group annuity contracts, if litigation moves to smaller plans
Little or no communication to employees
More to come with revenue sharing and share class selection, Non-level application of plan fees, capital preservation options...mvas, etc.
Same old, same old – fund choices, share classes, I-didn’t-save-enough-money-and-it’s-not-my-fault-I’m-gonna-need-some-more.
Whatever Schlichter thinks will make him the most money
I think it all revolves around fees and investment fund selection.
When index funds crash...those plans that use them exclusively will be attacked by litigation. Whatever didn't work ideally retroactively will be at risk for litigation. Not a good precedent...
Fixed accounts, lack of transparency/fee disclosure and revenue sharing
TDFs as the default fund due to performance
The whole industry is ripe for it and the political climate is perfect for more litigation. Avarice and jealousy are alive and well.
I believe fees will continue to be a focus in the near future.
It has been mentioned before but I suspect somewhere down the line we will start to see lawsuits because participants are nearing retirement and do not have the financial means to do so. Lawsuits will be directed at plan sponsor for not preparing/educating them properly.
Other Comments
And, as usual, we got a number of reader comments on the subject – here’s a sampling:
I feel like the litigation has caused plan sponsors to use zero revenue sharing funds and has lowered recordkeeping fees.
I find clients that focus their behavior as a defense against litigation really frustrating. While it is always a risk, priority of plan sponsor should be plan structure, cost efficiencies and retirement readiness—i.e., doing what is right for employees/plan participants. Then risk of litigation should take care of itself. (This may be naive but, litigation should be a non-issue if plan sponsors acted appropriately to begin with, and they have fiduciary liability insurance.)
Create a process for plan review: Either validate that all is well or get educated and use what you know as leverage to renegotiate. If you don’t, you are certainly leaving something(s) on the table.
ERISA says nothing about offering the lowest cost funds. ERISA states fees must be reasonable. There are areas of the market where historically active outperforms passive. (Fixed Income, International Equities) Going to all passive is a Fiduciary decision, you have taken away a choice from the participants.
It’s sickening to see what the attorneys get, and then what’s left for the ‘harmed’ participants. I would argue the participants have been ‘harmed’ twice!
Search consultants like me can help plan sponsors ask the right questions when hiring a service provider. Who’s monitoring their advisor???
The fund selection, in most cases, seems to be all about earnings. Half the funds out there earn less than the other half. It doesn’t mean they are bad funds, they all go through cycles.
The trend of fiduciary litigation is disturbing! It is not helping us to set up new plans...
It will eventually destroy the industry if left unchecked.
These should serve as a good wake-up call to plan fiduciaries, but many haven't reached the point they understand they are plan fiduciaries. In general the DOL should require a standard 408(b)2 template all providers are required to use. Many are still overly-complicated.
Thanks to everyone who participated in this week’s NAPA-Net Reader Poll!
