Federal Courts Still Parsing Prudent Plan Administration

Mayer Brown partners Nancy Ross and Laura Hammargren, from the firm’s Chicago office, and Brian Netter, out of Washington D.C., hosted a webcast on Wednesday to discuss the Employee Retirement Income Security Act (ERISA) litigation landscape and the ongoing compliance risks facing benefit plan fiduciaries.

In 2016 and 2017 there were over 100 complaints filed in federal courts targeting 401(k) plans, the attorneys said. The results of these complaints have been both positive and negative from the perspective of plan fiduciaries, according to Hammargren.

“The most positive outcome has been overall improvements in transparency and the most negative is that plans are offering less diverse investments—they are taking a more conservative approach to designing their plan menus,” Hammargren said.

Committee members are being made defendants and there has been very little consensus or direction from the courts as far as what exactly constitutes prudent administration of tax-qualified benefit plans, the attorneys agreed.

Looking back to earlier waves of litigation, there was more of a focus on investment selection, with attacks on stock funds being common due to the financial climate at that time—especially in the early 2000’s. Within the last three years, though, the majority of cases have been fee related and tied to allegations of self-dealing, disloyalty or imprudence. 

In the last year in particular, there have been new areas of litigation emerging as the plaintiffs’ bar is learning more about the possibility of extracting large settlement fees from retirement plans. There is greater uncertainty about the eventual outcomes of these cases due to partial dismissals and situations where judges may not see much merit in a complaint, but they allow discovery nonetheless due to the complex nature of retirement plan disputes.

“The precedents are all over the map,” Hammargren said.

From a plan sponsor’s perspective, a key concern is not achieving dismissal at an early stage of a suit. This is because the next stage is discovery—still technically a preliminary stage but one which can be very distracting and expensive. In 2017 more than 30 cases settled, totaling $529 million.

Of late, new defendants have come into the fold, including service providers that have become defendants even though they are not necessarily named fiduciaries. These cases have also resulted in mixed rulings and settlements.

Best Practices

The attorneys discussed the firm’s thoughts on best practices based on recent litigation. They shared the following list of best practices to consider:

• Pick committee members carefully. It is not wise to have general counsel or an organization’s CFO on a plan committee. Because they advise the company on a number of issues and are wrapped up with happenings across the organization, there could be disclosure issues.
• If a plan sponsor has one committee, there should be at least one member with a financial background and one with an HR background. The investment adviser should be part of the team and attend committee meetings.
• Be sure that committee members have written delegations of authority and they understand their limits of authority.
• If the plan has a stated mission and goals including types of investments they want to provide, it is imperative to adhere to that which is written.
• It is critical to have quarterly committee meetings but most importantly there must be more than just an annual meeting. Document as many details as possible. This will help when there is a lawsuit. Also, be cognizant of attorney-client privileges.
• Committee members should be familiar with plan terms and should read the plan documents at least occasionally.
• Committee members need to undergo annual fiduciary training.
• When selecting providers either use an RFP/RFI or reliable databases. Do go through the exercise of a formal RFP/RFI process at times, but it is not necessary to do so every three years, as some have suggested.
• Plan sponsors must be transparent with participant fees and monitor fees for competitiveness.
• Study 408(b)(2) disclosures—regulations that cover service providers.
• There are generally 10 to 15 investment options in an average plan and the menu should offer both passive and active investment choices. This diversity allows funds for the less and more sophisticated investors.
• Benchmark the plan for fees and performance and document this benchmarking. Stay abreast of peer plan investment choices and evaluate the pros and cons of particular share classes.
• Consider caps on company stock investments and an independent fiduciary for stock plans.