Economic downturns aren’t good news for anyone, but for plan sponsors and fiduciaries, they can signal double trouble as the harbinger of looming litigation. After the financial meltdown of 2008, the number of 401(k) complaints filed under the Employee Retirement Income Security Act of 1974 (ERISA) spiked to a high of 107. The number of new lawsuits dwindled to just two filings in 2013 before rising again. Experts fear the COVID-19 crisis could spawn a rash of new class-action 401(k) lawsuits from participants unhappy with the present state of their investments.
ERISA Attorney, Joel Shapiro, recently shared his perspective in a PlanFees webinar. Shapiro noted that participants tend to be less critical of account balances during bull markets and take greater notice during downturns and periods of high volatility. He also cautioned that during such times, plaintiff attorneys are more likely to target companies for alleged violations. These lawsuits typically file complaints in three areas:
- Inappropriate investment choices
- Self-dealing
- Unreasonable plan fees
What Is Considered Inappropriate?
The Department of Labor (DOL) does not maintain a list of “appropriate” investments. Instead, it tends to regulate by enforcement, bringing actions against companies or advisors because it thinks what they’re doing breeches their fiduciary duty. As a result, advisors often have to determine ultimately what is — or is not — appropriate on their own. DOL often focuses on the process fiduciaries use to select and monitor investments, and the lack of a formalized, documented process, rather than the choices they make, is often what gets them in trouble.
The Danger of Self-Dealing
Although self-dealing isn't a primary cause of action in 401(k) lawsuits, it’s still possible to run afoul of the DOL here. The fiduciary responsibility of the plan sponsor and advisor is to make sure that the plan is managed solely for the benefit of participants. Anything that smacks of a conflict of interest should be avoided. Including high-fee or low-performing proprietary funds in a plan’s investment menu can trigger a self-dealing complaint. So can loading up a plan with the employer’s own stock as it may appear that the employer is benefitting from the fund at the expense of plan participants.
Mitigating Fee-Based Litigation Risk
While the number of 401(k) complaints based primarily on investment choice has dropped, fees have become a greater focus of litigation in recent years, and fiduciaries must consider all fees that could adversely impact participants. Comparing fees with those of similar plans can help protect you. Shapiro cautions that, even during the COVID-19 crisis, advisors must continue to uphold their fiduciary duty. And it could be argued that it’s even more important to do so now.
An Off-Year Benchmarking Solution
According to Shapiro, off-year benchmarking during the years a plan isn’t put out to bid is one thing advisors can do to mitigate their risk of catching a 401(k) complaint. PlanFees has created a streamlined reporting process that can benchmark a plan’s fees against similar plans quickly and accurately. It uses data from the industry’s largest live-bid proposal system to benchmark fees in four key areas: Investments, record keeping, TPA and advisory. The web and mobile portals offer advisors a seamless method of generating benchmark reports, and by using a databased containing verified pricing data from more than 60,000 plans, PlanFees delivers comprehensive reports with unparalleled accuracy.
If history is any guide, this is a particularly important time to be vigilant about safeguarding your fiduciary responsibilities. Sign up for our next webinar to learn more about the risks faced by advisors and plan sponsors, as well as how PlanFees can help protect you.
