Liability-Driven Decisions

On a call with my editorial team the other day, we discussed yet another corporate plan sponsor being taken to court—it does seem that lately it’s been, another day, another lawsuit.

There is no doubt that litigators have been busy, both last year and in the early days of 2016. We are seeing new approaches to court cases, as well—whether a new attack on revenue sharing, continued focus on company stock, or new inquiries into stable value, fee structures or custom target-date funds (TDFs)—and these don’t show signs of letting up. The suits attack plan sponsors and also name recordkeepers and, in some cases, investment managers. Advisers seem to be getting a pass—so far. A quick scan of the compliance section on our website shows the quantity of these cases and brings a number of new attorney names into the Employee Retirement Income Security Act (ERISA) litigation world. Sadly, the pace is unlikely to slow either.

This doesn’t look good for your plan sponsor clients, as David Levine, a principal at Groom Law Group specializing in ERISA, points out: “We are in a world where every action could be put under the microscope—before we even gauge the impact of the fiduciary regulation on these lawsuits.” (Word of the fiduciary regulation arriving at the Office of Management and Budget [OMB] came as I was writing this, so we probably have about 60 to 90 days until we get to actually read the rules and start predicting what all of this means for us—likely, it will mean more allegations of fiduciary breaches if it creates many new fiduciaries, though.)

I realized how pervasive this fear of litigation was, just a week or so ago during our PLANSPONSOR of the Year finalist selection process. An adviser who had nominated a plan sponsor client for our award emailed me. She was concerned that, although this plan sponsor had reduced costs across its plan, both in administration and investment fees by approximately 30%—one of the main reasons for the nomination—perhaps to put such information out in the press or public domain wasn’t a good idea.

The gist of the email was: What if someone sees that and decides the sponsor should have pushed for more and found even lower fees? I think it’s disheartening that a plan sponsor and/or investment committee would not want to promote the hard work they are doing and wonderful things they are achieving for plan participants for fear of drawing attention to themselves. And I hoped the adviser would be able to reassure the sponsor and committee that they should remain proud of the work they had done and confident the due diligence was sound.

Jamie Fleckner, a partner in Goodwin Procter’s litigation department and chair of its ERISA litigation practice, has defended employers in a wide array of complex commercial litigation, including some of the cases you likely know quite well. His suggestions are to remain calm, not act rashly and know “there is no panacea in terms of plan design that … would avoid litigation.” So advisers should continue to help plan sponsors select and enact plan design that best achieves their plan’s intended outcomes.

We know, though, that fiduciary decisions can be full of emotion—understandable, considering the full weight of the responsibility—which might make it hard to remember to do the right thing, to put participants ahead of such self-concerns. In fact, Fleckner cited one court case that found a fiduciary breached its fiduciary duties when it removed an investment option for fear of being sued if that option remained in the plan; it was sued when the investment subsequently achieved outsized returns. That case reminds us that “fiduciaries who manage a plan just to minimize their own litigation risk are acting in their own interests and not in the interests of plan participants,” he notes.

Hearing from folks such as Fleckner and Levine, I get the sense that plan sponsors should not live in fear of being litigated—unless, of course, they have intentionally done something wrong or defrauded participants; then, I have no problem with that being found out. Otherwise, they should instead feel confident that, if they follow fiduciary best practices and due diligence, they have a strong defense. Levine’s opinion? “A prudent process and contemporaneous documentation is more essential than ever.”

As an adviser, you can play a large role in helping your clients remain confident that they are making strong choices on behalf of their participants. There’s no time like the present to review the work you’ve done with your sponsor clients and their investment committees to ensure they have a strong fiduciary file and continue to try to raise the bar for their participants.