Given the increase in the volume of cases being brought against retirement plan sponsors, we are often asked by our clients (1) what lessons can we learn from the litigation and (2) how can we reduce our risk of being sued and increase the likelihood of winning if we are sued?
So I spent some time recently coming up with my definitive list of how not to substantially reduce your likelihood of being sued for a fiduciary breach in the current climate.
- Use low cost index funds for your Qualified Default Investment Alternative
Marsh & McLennan, Booz Allen Hamilton, Microsoft, Cisco, Citigroup, Wintrust, Stanley Black & Decker
- Offer a large variety of investment options
- Create custom target date funds for your population
- Hire a 3(38) adviser to manage investment selection and monitoring
- Use Fidelity Freedom Funds for your QDIA
- Don’t use Fidelity Freedom Funds for your QDIA
Illinois Tool Works
- Fight fiduciary breach cases through the courts and win
New York University
My list is partially in jest. But only partially. The quote goes, “You don’t have to run faster than the bear to get away. You just have to run faster than the guy next to you.” The axiom holds when you apply it to fiduciary breach litigation. The plaintiffs’ bar is the bear, and every retirement plan in the country is a mammal.
If your plan is small, you’re a squirrel and frankly not worth the bear’s time to chase around. Not enough meat for the chase. But if you’re a deer or bigger, you’re a potential target for the bear. But if you’re an expert in the hunting habits of bears (and I wasn’t until recently, thanks Google), you’ll know that bears are selective in when and how they hunt deer. Generally, an adult deer can outrun a bear, so bears focus on fawns and injured deer. So, run faster than the deer next to you.
In each of the cases referenced above, there was the potential for a perceived breach making these plans more likely to get caught by the bear. In short, I can’t tell you how to avoid the bear, but I can tell you what the bear is looking for when hunting.
Underperforming or Expensive Target Date Funds – For most plans, target date funds are the largest asset holding, so if a plaintiff can prove fiduciary breach, the damages or settlement amounts are much higher. In most cases, target date performance is driven by asset allocation. More aggressive funds do well in upmarket cycles when more conservative funds may struggle. Chasing performance is always a mistake, but if performance is beneath peers or costs are above peers, documenting why will be critical.
Too Many Funds – Fiduciaries have an obligation to continuously monitor all of the investments available for participants. Reasonably, the larger the number of funds the more difficult, and potentially less likely, it is that consistent due diligence is being conducted. You can have as many funds as you like but ensure all of them are being consistently and competently reviewed.
Don’t Regularly Evaluate Your Recordkeeper – Nearly every fee case brought through the courts has asserted that the sponsor had not completed an RFP to evaluate recordkeepers recently. Developing a consistent schedule for conducting recordkeeper RFPs is an important approach.
However, even if you do all I have suggested and the bear is hungry enough the hunt may begin and once it has begun, your ability to prevail in the courts will come down to the quality of your process and documentation. Having a fund or group of funds that don’t do well will not be the problem, not knowing how they got there or why they stayed will be.
And now, my analogy breaks down at the end of my post. Bear and deer are roughly equivalent in speed, but where the deer prevails is in their stamina. They can run at full speed longer than your typical bear. That doesn’t hold true in retirement plan litigation. The range of settlements seems to imply it is the bear that can run for years, where the deer eventually pays the bear to let them pass.
It has been encouraging in the wake of the Northwestern decision to still see courts willing to dismiss claims brought against plan sponsors and rebuke cases they perceive to be frivolous. However, the bears are hungry and breeding, so the future remains uncertain.
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