10 best practices for retirement plan fiduciaries

Is there any end in sight to the torrent of litigation against sponsors of retirement plans?

Not likely, say attorneys at Mayer Brown, a firm that’s defended employer sponsors at the district court and appellate levels in some of the country’s largest ERISA claims.

A rash of settlements in the past several years has motivated what Nancy Ross, co-chair of Mayer Brown’s ERISA litigation practice, calls a “very aggressive” plaintiffs’ bar.

“Settlement drives the plaintiffs’ interest,” said Ross in a webinar. “The motive is to get to discovery, and soon thereafter try to broach the possibility of settlement.”

In 2017, 30 cases settled for an aggregate of $529 million. Allegations of excessive investment management fees and recordkeeping costs, imprudent revenue sharing and mutual fund share class selection, and the inclusion—or lack of inclusion—of stable value funds can be expected to continue into this year.

But claims against insurance companies, money mangers, and banks using their own proprietary funds in the defined contribution plans they sponsor “are the darling of the plaintiffs’ bar right now,” said Ross.

The 20 class actions that have been filed against university sponsors of 403(b) plans since 2017 have added a new wrinkle to the trend of ERISA litigation. Four of those claims have been dismissed; the claim against New York University made it to a bench trial, where the court ruled in favor of NYU.

Attorneys for the firm also said there has been a recent resurgence in stock drop claims, prompted by a ruling in the Second Circuit Court of Appeal that overturned a lower court decision in a stock drop claim against IBM.

While some sponsors have successfully had claims dismissed, the precedent for dismissal across the circuits is “all over the map,” said Ross, a factor that is likely to encourage more claims going forward. There have also been “creative attempts” by some judges to avoid precedent when ruling on dismissal, she said.

If motions to dismiss are denied, sponsors are increasingly motivated to settle claims: the ensuing discovery phase of litigation is “expensive and distracting” for employers, says Ross.

While there is no silver bullet to protect sponsors before and during litigation, the ongoing era of ERISA litigation has fine-tuned the best practices sponsors can deploy to avoid and defend against claims.

Here is a list of 10 practices cited by the ERISA litigation team at Mayer Brown.

1. Pick investment committees carefully.

Mayer Brown advises against including a company’s general counsel as part of the investment committee that oversees a company defined contribution plan.

GCs advise company leadership on a range of issues, and consequently could be perceived as being conflicted in advising on the administration of a 401(k) plan.

Adding legal counsel to an investment committee is, however, advisable. The attorneys recommend an in-house benefits attorney.

2. Don’t seat your CFO on investment committee.

Though it may seem logical, the attorneys also say it is best not to invite company chief financial officers to sit on investment committees.

A CFO is intertwined in all aspects of a company’s performance, and her seat on an investment committee could also be perceived as being conflicted.

3. Choose a balanced investment committee.

Investment committees should be composed of a balanced mix of those with investment and financial acumen, and those with human resource and benefits expertise.

Equally important is for committees to maintain written, documented delegations of authority for all committee members, the attorneys say.

4. Use an investment policy statement.

Have an investment policy statement that identifies a retirement plan’s mission, goals, and they type of investments it wants to provide, the lawyers say.

But if you have an ISP it’s no help to not use it. “You have to adhere to it,” says Ross. “You can’t just have it sitting on a shelf.”

5. Document detailed fiduciary process.

A plan’s fiduciary process should be sufficiently documented. “As much detail as you can have will help if you are in a lawsuit,” says Ross.

More investment committees are meeting quarterly. That may not be necessary, says Ross, but it is advisable to meet more often than annually.

And committee members should be familiar with the language and terms in the plan.

That may seem obvious, but Ross said depositions in some cases have proven committee members’ lack of basic familiarity with the plans in question.

6. Use RFPs for service providers, but not as frequently.

The plaintiffs’ bar is emphatic that plan sponsors must use request for proposals to assure a competitive biding process for selecting record keepers and other service providers to plans.

The attorneys at Mayer Brown disagree with that principle — databases of provider costs can also be used to adequately vet firms.

RFPs can be “costly and distracting,” said Ross. Nevertheless, it is a good idea to issue an RFP, but not as frequently as the plaintiffs’ bar claims.

Ross says a sponsor can issue an RFP “less frequently” than every three to five years.

7. Fee transparency is crucial.

All plan costs must be clearly understood by fiduciaries to plans. Service providers must disclose their costs, but plan fiduciaries should push back on providers if the fees are not clearly understood.

Fiduciaries also need to understand service providers’ arrangements with other vendors—for instance, if a recordkeeper is earning fees through third-party investment advisory services.

8. Diversify fund lineup.

There is no standard for the number of investments fiduciaries should use when designing an investment menu, but 10 to 15 options is generally the “sweet spot,” says Ross.

Fiduciaries need to diversify investment menus with a mix of index and actively managed funds. More commonly, fiduciaries are using tiers of options—a core lineup, and brokerage window for more sophisticated investors among a participant population, and a stable value fund for capital preservation.

“You need to be very methodical in selecting investments,” said Ross. Investment committees should consider bringing a plan’s investment advisor into the fold, as they bring a wealth of knowledge as to how other sponsors are designing menus.

9. Benchmark fees and plan performance.

Benchmarking plans for its fees and its performance is critical, as is documenting the benchmarking.

On share class selection, it is also necessary to document why institutional or retail share classes were selected.

If retail shares are selected to offset the cost of recordkeeping, that process and reasoning has to be documented.

10. Cap use of company stock.

Sponsors can offer company stock in an investment menu to incentivize productivity among workers. But overloading savings in company stock can be a red flag.

The attorneys recommend a cap on investment in company stock. Some plans have a 10 percent cap, others a 25 percent cap, the attorneys note.

To completely neutralize the potential liability in offering company stock, an independent fiduciary could be retained.