The biggest fiduciary challenge for plan sponsors: How to navigate increasing risk

With a sharp increase in excessive fee lawsuits this year and the U.S. Department of Labor’s interim final rule requiring lifetime income disclosure information, it’s never been more challenging to be a fiduciary. For some perspective, we turned to Wendy Von Wald, Fiduciary Liability Product Manager at Travelers to discuss the role of fiduciaries and how plan sponsors can safely navigate such a difficult environment.

BenefitsPRO: Why are we continuing to see a spike in excessive fee claims?

Wendy Von Wald: A few things are driving that. The fees earned by plaintiff attorneys who file these cases are not insignificant – they typically receive 33% of the settlement amount. Also, the very low dismissal rate of excessive fee claims does not deter the filings. Until there is an appropriate filing standard applied to this litigation, either by judicial ruling or by legislative changes, there does not seem to be a reason for them to slow down.

Is there some way that plan sponsors can avoid this excessive fee litigation?

Short of not offering a 401(k) retirement plan, it would be difficult to completely avoid the possibility of receiving one of these lawsuits. Many employers need to offer a 401(k) plan to compete for the best talent. That said, there are ways to reduce the chances of receiving an excessive fee claim:

• Select and monitor plan service providers who are reputable and accept status as fiduciaries.
• Conduct a request for proposal (RFP) for plan service providers with some degree of regularity, ideally every 3–5 years or as plan changes warrant. Also, review plan fees between RFPs and have them benchmarked by an outside consultant.
• Use counsel focused on the Employee Retirement Income Security Act (ERISA) to stay informed about trends in litigation against fiduciaries. Consider using ERISA counsel or the plan recordkeeper for annual fiduciary education training.
• Monitor plan investment options for performance, and place options that are underperforming on a watch list.
• Restrict the use of plan participant data by the recordkeeper for sales of products or services outside of the retirement plan contract. If restricting the use of this data cannot be accomplished, plan fiduciaries should use this to negotiate lower fees.
• Refrain from using a subsidiary or affiliate as a service provider to the plan.
• Refrain from offering funds the employer sells to third parties as investments.
• Listen to experts hired to provide advice for the plan, but, at the same time, be willing to challenge their recommendations and ultimately make decisions that are in the best interests of plan participants.

What are some of the biggest challenges and exposures for fiduciaries in offering a defined contribution retirement plan?

Challenges include offering a plan with a variety of investment options that provide the best opportunity for growth of retirement funds while not being too conservative; avoiding the potential for someone to argue the plan fees are excessive; and responding to requests from plan participants for specific investment options.

What should plan sponsors and fiduciaries be considering when it comes to layoffs and furloughs arising from the impact of the COVID-19 pandemic?

Start by reaching out to the plan’s administrator to ensure COBRA notices are in compliance with recent regulations. Review a plan’s documents in conjunction with any layoffs or furloughs to understand any benefit implications to plan participants that might require additional notices. As with any matters regarding employees and benefits, it is good to consult with legal counsel.

Because of the costs and the disruption to businesses, could not offering a plan ultimately be the best decision?

This may be an option for some employers. However, with the SECURE Act’s PEP (pooled employer plan) provisions, many may be able to adopt or join such a plan and reduce their exposure to significant ERISA litigation.

What’s the hardest part of being a fiduciary in today’s climate?

I would imagine that most fiduciaries worry that making a change will trigger a claim because it might be alleged the change should have been made sooner or was the wrong one to make.

Why would the Department of Labor’s interim final rule mandating annual lifetime income disclosure information for plan participants be a good thing?

With the possibility that Social Security will not be available to much of today’s workforce, it is time we start changing the way plan participants view their 401(k). Participants should look at these plans as not just fund accumulation vehicles but ultimately an amount that will be needed to support them after they’ve retired. Without lifetime income disclosures provided by plan sponsors, participants will be less likely to change their thinking about their 401(k).

Why could this be a bad thing? Newer participants to a 401(k) plan may see the income illustration, become disheartened and reduce their contributions to the plan.

Plan participants may not understand the disclosures, particularly those including annuity provisions. Given everything plan sponsors and fiduciaries think about in terms of ERISA liability, this interim rule adds to that.

Ultimately, whether good or bad, the SECURE Act requires these disclosures.

We’re hearing more about fiduciary liability insurance these days. Can it help?

Fiduciary liability insurance can provide the defense and indemnity needed by a plan fiduciary, a sponsor and the plan itself when a lawsuit has been filed. Those claims often allege either an error in the administration of a plan or an alleged breach of fiduciary duty under ERISA. It is the only product that provides coverage for both.