Staying Out of the Courthouse: Keys to Avoiding Retirement Plan Lawsuits
It’s a sad but undeniable fact that we live in an increasingly litigious society. And this holds especially true for employer-sponsored retirement plans. According to the Society for Human Resource Management, the last couple of years has seen record-breaking numbers of lawsuits against plan sponsors for various breaches of fiduciary duty. There were five times as many suits filed in 2020 as in 2019, and the pace was even greater in 2022. And it’s not just the big plans that are being targeted: Even plans with only $1 or $2 million in assets are being sued.
And the financial implications are anything but minor. According to a 2022 annual report on workplace class-action settlements, the top 10 ERISA settlements in 2021 amounted to $837 million in damages paid by plan sponsors, more than double the 2020 total of $380 million. Most of these lawsuits alleged uncompetitive plan fees or poor investment performance, both matters that fall under fiduciary oversight.
Nobody wants to spend the time and money to defend against a lawsuit, much less be forced to pay the kind of damages that go with losing one. Fortunately, there are some steps you can take to make it less likely that your plan becomes a target for plaintiffs or if it does, that you’ll lose in court.
The Good Fiduciary
It all starts, of course, with remaining vigilant about your principal fiduciary duties as a plan sponsor:
- acting in the best interest of plan participants;
- exercising prudent selection of suitable investments;
- offering sufficient diversity in your investment menu;
- adhering to plan documents;
- ensuring reasonable, competitive fees and expenses;
- avoiding conflicts of interest.
Documenting your fulfillment of these duties is your best protection against getting sued or losing a suit. Of course, even with the best due diligence in place, some funds will underperform from time to time. But when you document and benchmark the problem and show that you have taken steps to hold fund managers accountable, you’re much less likely to be named as a party in a lawsuit. Especially where fees and expenses are concerned, it’s vital to show that you have monitored fees, compared them to those of peer funds and, when necessary, taken steps to either get the fees reduced or change to a different fund manager with more competitive rates. As a fiduciary, you are obligated to advocate for your plan participants in order to ensure the plan is competitive and appropriate. An established schedule and good recordkeeping are essential elements of providing proof of your commitment to these obligations.
Being Compliant
Attention to filing deadlines, notifications to participants, required reports, and other compliance procedures is paramount. And, though not required by ERISA regulations, maintaining and updating an investment policy statement (IPS) can provide key protection against questions about how investment options are chosen for the plan. In fact, regulations stipulate that having an IPS is consistent with meeting fiduciary responsibilities for the plan. Frequently, the IPS will be the first document requested by the Department of Labor when conducting an audit.
Document, Document, Document
A recent high-profile suit against a retirement plan, Hughes v. Northwestern University, came down in part to the university’s failure to adequately document the decision-making process by which investments were added to the plan. Courts will not always require that the plan’s investments be the highest performing year after year or that their fees will always be at the bottom of the scale, but they will require sponsors to prove that investments are selected according to criteria consistent with the plan documents and in the best interests of plan participants. In other words, you already know what you’ll need to prove in order to help potentially avoid or prevail in a lawsuit. So don’t take chances; keep good records and keep them updated frequently.
One of the benefits of working with Savant Retirement Plan Services is our focus on active oversight and due diligence on behalf of our clients. Our goal is to reduce fiduciary risk for plan sponsors and provide professional guidance for plan administration, plan design, and service to plan participants. To learn more, visit us online.
Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois. Past performance may not be indicative of future results. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.savantwealth.com. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement.
Patricia L. Hutchinson
Director of Retirement Plan Services
MBA