3 retirement plan fiduciary considerations in the wake of COVID-19

ERISA requires retirement plan fiduciaries to do what a like fiduciary would do under the circumstances then prevailing. There is no debate that the COVID-19 pandemic has presented a particularly unique set of circumstances in this country. The stock market took the largest downturn since the 2008 financial crisis. That downturn – coupled with the rapid change in societal behavior and stay-at-home orders – has caused a ripple effect resulting in an unprecedented number of company shutdowns and bankruptcies, mass layoffs and furloughs nationwide.

While there is nothing inherent in the health crisis itself that affects retirement plans, fiduciaries might nevertheless be wondering what they should be doing – in the wake of, or in spite of – the unique circumstances presented by the COVID-19 pandemic and its effect on the market.

While fiduciaries should have – and follow – a prudent process to monitor the plan’s investments during normal times, a thorough review of the plan’s investments, fees, and performance would certainly be sensible and might avoid a lawsuit down the road. Here are some things to consider:

1. Target-date and other custom funds: Even before the COVID-19 crisis began, target-date funds in 401(k) plans had become a hot target of the plaintiffs’ bar.

Brought by plan participants or beneficiaries, these lawsuits allege that plan fiduciaries violated their ERISA duties of prudence and loyalty by selecting target-date funds for a plan without adequate investigation, particularly proprietary target-date funds and new, “custom” funds without a sufficient track record.

Significantly, target-date funds are commonly used as a defined contribution plan’s qualified default investment alternative (QDIA) such that participants’ plan contributions are automatically invested in the target-date fund that aligns with their target retirement date if they do not otherwise specify how to allocate their contributions. Because it is often the plan’s QDIA option, it is most often the single largest investment in a plan.

Target-date funds lost a significant amount of value in the 2008 financial crisis, and the recent market downturn due to COVID-19 suggests a similar fate in 2020.

In addition to the cases pending before the first quarter of this year, there have been a handful of lawsuits filed since the COVID-19 crisis began challenging target-date fund selection in a 401(k) plan. Plan fiduciaries would be well-served to revisit any target-date or other “custom” funds in the plan to ensure performance is in line with expectations, and consider whether these particular selections are still a prudent choice for the plan.

2. Excessive recordkeeping and/or investment management fees: Litigation involving supposed “excessive fees” paid by participants in retirement plans shows no signs of slowing down in the wake of COVID-19.

These cases generally involve claims that fiduciaries of defined contribution plans caused the participants to pay high recordkeeping and/or administrative fees or failed to solicit competitive bids for vendor services.

Participants also challenge investment options or share classes that are more expensive than comparable funds. These excessive-fee lawsuits have been filed not just against large companies sponsoring “mega” sized plans but more recently have been targeting small and medium-sized plans as well.

While these cases have been around for quite some time, participants are likely scrutinizing their retirement plan statements and account balances – along with the monthly or quarterly fees taken out of their accounts – even more so now than before the pandemic began.

This is particularly true for those who have recently lost their job, had a spouse that lost their job, or are nearing retirement. Now would be a good time to revisit all of the plan’s fees to see if there is any negotiating room that would benefit participants.

And it certainly never hurts to check all participant fee disclosures to ensure they are clear and accurate.

3. Other investment changes: While COVID-19 might present a unique set of circumstances and market conditions, this is not necessarily the time to make radical changes to a plan’s investment lineup. Rather, now is the time to monitor the plan’s investments, seek expertise, and ensure that a prudent process for evaluating the investments is followed.

Significantly, the plaintiffs’ bar has been ever-increasingly challenging fiduciaries’ adherence to their own investment policy statement when making changes to a plan’s investment menu.

They claim the fiduciaries did not follow a prudent process any time there are any deviations from the four corners of the investment policy statement. To the extent plan fiduciaries decide to change the plan’s investment selections or add new investment selections at this time (related to, or independent from, the COVID-19 pandemic), it would be a good idea to revisit the investment policy statement when doing so.

In particular, consider whether that decision aligns with the investment policy statement, or if the statement also needs revision to address new market conditions.

All of these lawsuits have met with mixed success in recent years, but one thing is certain: Having a prudent process in place to review and monitor investment performance and fees is the best defense for any fiduciary decision, including those decisions made during these unique times.

Emily Seymour Costin is a partner in the Washington, D.C. office of Alston & Bird, LLP, where she primarily represents employers, plan sponsors, insurers, and fiduciaries in employee benefit disputes and advises on litigation avoidance strategies. Emily has experience defending individual, mass action, and class action claims for benefits and breach of fiduciary duty under ERISA. She has experience litigating various types of benefit plan disputes, including those involving investments, excessive fees, employer stock, actuarial factors, benefit termination, and health care matters.