Lessons for advisers from 401(k) lawsuits

There are clear steps that retirement plan fiduciaries can take to reduce the risk of litigation to near zero

Mar 5, 2019 @ 2:06 pm

By Blaine Aikin

Perhaps nothing causes as much anxiety for retirement plan advisers as the potential for a client to be hauled into court to face accusations of fiduciary breaches. Even in the best-case scenario where the plan successfully defends itself, dealing with litigation is a disruption and drain on resources that otherwise could be spent on helping participants achieve their investing goals.

A survey of recent 401(k) litigation reveals two truths. First, the risk of litigation is real and the costs are great.

A recent study by the Center for Retirement Research at Boston College shows 107 complaints related to 401(k) plans were filed in 2016 and 2017, the most in a two-year period since 2008 and 2009 after the financial crisis. Those cases have resulted in hundreds of millions of dollars in settlements, heavy reputational damage to the companies involved, and countless hours spent by plan sponsors and service providers in dealing with litigation.

It is also bad news that litigation is inversely correlated to financial market performance; when markets fall, complaints rise.

Second, the errors of omission and commission made by the plans facing complaints were obvious and preventable. Nearly all claims fall into one of just a handful of categories, and there are clear steps that plan fiduciaries can take to reduce the risk of litigation to near zero.

There are five forms of particularly risky behavior for plan fiduciaries:

• Neglecting to have and follow prudent fiduciary policies, procedures and practices;

• Incurring unreasonable costs;

• Failing to avoid or mitigate conflicts of interest;

• Offering inappropriate investment choices; and

• Lacking transparency about information that is material to participants' decision-making.

The first of the five forms of bad behavior is the most important to correct because prudent policies, procedures and practices will necessarily cover costs, conflicts, due diligence and proper disclosure of material information.

This point is clear in the Boston College study's central conclusion, that "from the courts' perspective, fiduciaries' main responsibility is to follow a prudent process in making plan-related decisions."

(More: Have 403(b) lawsuits hit a wall? Fifth university wins dismissal)

It's not just the risk of litigation that should prompt plans and their service providers to adopt prudent practices. In 2018, the Labor Department's Employee Benefit Security Administration restored over $1.6 billion to employee benefit plans, participants and beneficiaries through its enforcement actions.

The EBSA seeks to achieve voluntary compliance through programs like its Voluntary Fiduciary Correction Program. Failing that, it will pursue litigation (111 cases in 2018) and seek criminal indictments related to crimes involving employee benefit plans (142 in 2018).

One of the most telling observations about lawsuits and EBSA investigations is that as soon as they begin, plan fiduciaries jump into action to change their behavior. They seek fiduciary training, conduct internal assessments of what they have been doing wrong, name senior leadership team members to institute fiduciary best practices, conduct competitive selection processes for service providers, engage an independent plan fiduciary to ensure competent and objective plan oversight, evaluate the costs incurred to administer the plan and associated plan investments, critically assess conflicts of interest that may compromise their obligation to serve the best interests of plan participants and beneficiaries, and commit to providing full and fair disclosure of information about the plan and plan investment options that is material to participant decision-making.

Plans under siege don't just hunker down to do battle, they take the very actions that would have kept them out of trouble in the first place. These actions are also often formalized as commitments going forward in settlement agreements.

Even though most plaintiffs lose in court (at least in the first round), the fact that they have legitimate grievances is clear from the reforms that plans make when placed under scrutiny. Initial decisions are routinely appealed, resulting in protracted litigation that lasts for years if a settlement cannot be reached. Throughout this process, the plan sponsor is forced to publicly defend practices that clearly fall well short of best practices, even if they're not legal violations.

Litigation and regulatory actions are tragically costly and inefficient ways to capture the attention of fiduciaries and correct retirement plan deficiencies. Plan participants, sponsors and service providers all suffer unnecessary direct and opportunity costs that could have been avoided by better plan management.

(More: Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry)

The opportunity for retirement plan advisers is clear. Use the lessons of litigation to teach plan sponsors that complacency about proper retirement plan management represents an unacceptable business risk.

Having fiduciary liability coverage is a necessary but insufficient part of managing that risk. An experienced and expert retirement plan adviser, perhaps even serving as an outsourced ERISA Section 3(16) plan administrator, can proactively implement and maintain fiduciary policies, procedures and practices that will mitigate risk and truly serve the best interests of plan participants and beneficiaries.

(More: Why you should still take the fiduciary high ground on 401(k) rollovers)

Blaine F. Aikin is executive chairman of fi360 Inc.


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