3 best practices for avoiding a fiduciary breach

Given the many lawsuits filed against retirement plan sponsors in recent years for breaching their fiduciary duties, here are the steps plan committees should be taking to mitigate risk.

Lately the news cycle has been riddled with stories of retirement plan committees being sued for breaching their fiduciary duties. While the first wave of lawsuits concerned defined-contribution plans at for-profit companies, the trend has since pivoted to target not-for-profit companies and institutions of higher education.

While it’s true that the majority of the lawsuits have targeted larger retirement plans, the lessons that plan sponsors and retirement plan advisors can learn from the mistakes of those plan committees are applicable for plans of all sizes. All committees are subject to the same standards of fiduciary conduct under ERISA, and the lawsuits in question can serve as a blueprint for what not to do as a retirement plan committee member.

By employing certain fiduciary best practices, you can help mitigate your risk as a retirement plan fiduciary while simultaneously making your retirement plan more efficient and responsive to your employees. Consider implementing these three strategies when evaluating your own standards of care as a fiduciary.

DETERMINE REASONABLENESS OF ADMINISTRATIVE FEES

A frequent finding in fiduciary breach lawsuits is that plan committees imposed unreasonable administrative fees and forced participants to overpay for plan expenses. By failing to regularly vet a plan’s fees, retirement plan committees can find themselves subject to the same fate. However, this mistake is avoidable.

Regularly assessing the magnitude and reasonableness of a plan’s fees is a primary fiduciary responsibility under ERISA. Such assessments should be conducted at least annually to see exactly how much participants are being charged.

Several years ago, the Department of Labor mandated that all service providers to participant-directed plans that were paid from plan assets disclose their annual fees. These fees should be regularly benchmarked in comparison to a representative sample of plans similar in both assets and participants to ensure participants are not overpaying.

ASSESS THE INVESTMENT LINEUP ON A REGULAR BASIS

Operating as a “prudent man” is one of the guiding principles under ERISA, and it’s hard to argue a plan is acting prudently when most of its investments are selected from a single investment company or mutual fund family. This practice would assume one investment manager has the best performing fund in every asset category, which is rarely the case.

A fiduciary should instead diversify their investment lineup by picking an optimal fund in every asset category from a large universe of investment managers or fund families, as opposed to restricting their selection to those available in a single company. The goal of this practice is to open up the architecture of the investment universe to ensure participants are receiving a wide range of high-quality funds.

Many of the retirement plan committees currently embroiled in lawsuits failed to diversify in this manner. To make matters even more suspicious, many of their investments also happened to be manufactured or distributed by the firm they used for record keeping. Consider regularly vetting an investment lineup on a quantitative and qualitative basis.

OFFER LESS EXPENSIVE ALTERNATIVES

Another key principle of ERISA is that fiduciaries must manage the retirement plan for the benefit of participants, which means acting in the plan’s best interest should be a top priority. Some retirement plan committees are being sued for picking higher share classes to reduce the plan sponsor’s operating costs, hence acting in the sponsor’s own best interest as opposed to that of participants.

By failing to select the lowest-cost version of the funds being offered, plan committees inherently breach their duty under ERISA. Fiduciaries must be sensitive to the share class of the investments offered to plan participants.

Selecting the lowest-cost version of the plan’s investments is a crucial step to help mitigate the risk of an ERISA lawsuit. If one fails to do so, it can be argued that they have inherently failed to operate the plan for the exclusive benefit of the participants and legal action may be taken.

SUMMARY

While the number of lawsuits in the news may be alarming, the mistakes made by key players are also avoidable. Employing best practices and prioritizing the needs of plan participants are crucial steps to help mitigate risk of a fiduciary breach. Knowing your duty of loyalty as an ERISA fiduciary is essential to successfully operating in the role.

If plan committees are unsure of the details of their specific duties and responsibilities under ERISA, they should consider working with an outside fiduciary who has a proven expertise in retirement plan governance matters.

Alan Pfeffer is senior vice president of retirement advisory services for Sentinel Group.