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401(k) Fiduciary Litigation on the Rise – Take These Steps Now to Avoid Liability Later

A recent spate of lawsuits against large employers’ 401(k) retirement plans (a Plan) has refocused attention on the need for plan administrators to ensure that they are honoring their fiduciary duties and prudently managing their Plans. Many of these recent lawsuits allege that Plan administrators use costly investment options, fail to consider alternative investment options, and fail to exercise negotiating power to reduce fees.

While there is no magic bullet to preventing such lawsuits, Plan administrators should take several steps now to ensure that: (a) they have good answers when plaintiffs’ lawyers come knocking on the door, and (b) they have good defenses when lawsuits are filed.

  • Benchmark: When evaluating what investment options to offer, a detailed analysis of the fees, investment strategies, and past performance of various funds is critical to ensuring that the Plan administrator acts with sufficient knowledge and can make an informed decision. A Plan administrator is not required to choose the lowest cost alternative, but an analysis like this one can help avoid hindsight bias if a Plan administrator chooses a more expensive option. Third-party investment advisors offer a variety of such services.

  • Regularly Reevaluate: Like everything else, investment options change over time. Setting a regular schedule to reevaluate existing investment options ensures that what may have been a competitive and prudent choice in past years no longer makes sense for the Plan and its participants.

  • Negotiate: Retirement plans have leverage, though the amount of that leverage, of course, varies with their size. Nevertheless, there is certainly no harm in contacting investment funds (or third-party record keepers, for that matter) and attempting to negotiate lower fees on behalf of the Plan’s participants.

  • Offer a Variety of Investment Options: One way to act as a fiduciary to Plan participants is to ensure they have a wide range of investment options available to them under the Plan. While some participants would surely prefer the lowest fee passive investment option, others would just as surely prefer investing in an actively managed fund, even if the fees are a bit higher. By offering both passive and actively managed options to participants, Plans can provide the preferred approach for both types of investors.

  • Make Detailed Investment Disclosures: In conjunction with offering a range of options, a prudent Plan administrator will also provide substantial information to participants about each option.Such disclosures will include a fee schedule. In fact, ERISA requires an annual fee disclosure to be provided by a Plan administrator to participants. By providing: (1) a variety of investment options and (2) detailed information regarding each option, it becomes difficult for a participant to complain about the Plan’s decisions.

  • Attend Fiduciary Training: Consider having all individuals who act in a fiduciary capacity attend recurring training on their fiduciary duties. Regular reminders of obligations and best practices for ERISA fiduciary duties ensures that fiduciaries are aware of current best practices, as well as the types of litigation that are percolating.

  • Document Everything: Finally, and most importantly, it is vital that the Plan administrator document in-depth all of the actions it has taken – and the reasons for those actions -- to ensure that it is acting as a prudent manager and as a fiduciary to the Plan’s participants and beneficiaries. As important as it is to do all the right things, it is equally important to be able to prove that you did them. For better or worse, we live in a time and place where people expect to see documentation. Any steps that an administrator or committee claims to have taken, but which cannot be proven through contemporaneous documentation, will be subject to great scrutiny.

Of course, none of these steps are foolproof on their own, and even well-prepared Plans face frivolous lawsuits. However, when taken collectively, these steps help ensure that a 401(k) plan does not present a soft target for a plaintiff’s lawyer looking for a big payday.

© 2020 Foley & Lardner LLPNational Law Review, Volume X, Number 230
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About this Author

Ryan N. Parsons, Foley Lardner, Food and Beverage Lawyer,
Senior Counsel

Ryan N. Parsons is an associate and litigation lawyer with Foley & Lardner LLP. He is a member of the firm’s Labor & Employment Practice and Food & Beverage Industry Team. Prior to joining Foley, Mr. Parsons served as a law clerk for the Hon. Diane S. Sykes, U.S. Seventh Circuit Court of Appeals. During law school, he worked as a summer associate in Foley’s Milwaukee office (2009) and as a judicial intern to the Hon. David T. Prosser, Jr., Wisconsin Supreme Court and the Hon. Lynn S. Adelman, U.S. District Court.

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