Over the last decade, there has been a surge in lawsuits filed for alleged mismanagement of retirement plans. This is – and should be – concerning for plan sponsors of all shapes and sizes across the U.S. Retirement plan participant plaintiffs against plan fiduciaries cite numerous different allegations. Plan sponsors should take heed on how to prepare and protect their plans and fiduciaries.
In a recent case, six New York University professors and an instructor sued NYU for breach of fiduciary duties under ERISA for allegedly allowing “unreasonable expenses to be charged to participants for administration of the plans and [retaining] high-cost and poor-performing investments compared to available alternatives.” The plaintiffs also urged federal judge, Katherine B. Forrest, to remove two of its retirement plan committee members who oversee these plans that total $4.2 billion and have more than 25,000 participants. The case claimed committee members were inept and could not make educated decisions for the plan, which led to more than $358 million of losses at two 403(b) plans.
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The judge ultimately ruled for NYU. She explained that the plaintiffs did not prove that the retirement plan committee acted imprudently or caused losses that left them with a poor performing investment options and excessive fees. Forrest did comment that “while the court finds the level of involvement and seriousness with which several committee members treated their fiduciary duty troubling, it does not find that this rose to a level of failure to fulfill fiduciary obligations.”
In addition to the committee performing its role adequately, the judge explained that the committee sought guidance from more well-equipped members and relied on a consultant with “deep knowledge and understanding” of the plans.
While Forrest found for the plan fiduciaries on every claim in the case, she wasn’t overly impressed by plan committee members and their lack of knowledge and appreciation for their roles. She went on to fault some committee members for being unfamiliar with basic concepts about their jobs as well as having no appreciation for the significance of the role of fiduciary. In fact, the judge cited other issues with the committee such as:
- One committee did not even know whether he was currently a member of the committee or not (or that he was a fiduciary to thousands of employees).
- Certain members testified that they assumed that on financial issues (a significant portion of the committee’s responsibilities), they could defer virtually entirely to the co-fiduciary for expertise and information and rely on its recommendations. This is not true. Committee members must meaningfully probe a co-fiduciary’s advice and make informed, independent decisions.
When it came down to it, what NYU had on its side was the committee having a well-documented process that included a series of meeting dates and report delivery, review and recommendations.
Even though this worked for NYU, this ruling does not mean that ill-informed plan fiduciaries can completely rely on a good process to solve all their litigation issues. However, it does demonstrate the importance.
Some steps to help protect fiduciaries:
- Avoid high recordkeeping fees. Get the full picture by conducting benchmarking comparisons with similar assets, participants and services.
- Don’t pay too much for plan investments. Find out if less expansive share classes are available for your plan. Be sure to document your findings.
- Vet your recordkeepers. Sometimes less is more and sometimes having more than one provider suits your needs. Ensure that the best interests of participants is being served. See what is available, compare costs and services and document and review your process.
- Conduct a recordkeeper search. A good practice is a comparative search via an RFP every 3-5 years. This helps ensure fees are satisfactory and offerings are current. Maintain all results.
- Limit investment options. There is an argument that too many choices can cause confusion or deterioration of the plan benefit, but others want options. Give consideration to the investments in the plan and offer choices without overwhelming. Again, keep good records of your process.
- Assess fees. Consider both asset-based fees and flat dollar amount. Decide which model makes the most financial sense for your organization. Benchmark plan fees on an annual basis. It is best to consider your options and keep good records of such.
Email the retirement plan services team at Rea & Associates to learn more about your responsibilities as a fiduciary.
By Paul McEwan, CPA, MTax, AIFA (New Philadelphia office)