Recent court cases, including Tibble v. Edison, have exposed 401(k) plans to greater scrutiny.
“It is the cumulative effect of the cases in the aggregate that has caused greater attention in the media and among employers as it has become clear from the Supreme Court on down that you can’t keep your 401(k) plan in a closet,” says Jerry Schlichter, founding partner of Schlichter Bogard and Denton in St. Louis. “You’ve got to make sure the plan is run for the sole benefit of employees and retirees. It has never been more clear than it is now. And it is clear employers are taking their responsibility more seriously as more attention is drawn to their practices.”
In the past couple of years, due in large part to fee disclosure regulations that went into effect in 2012 and hearings and discussions over the past couple of years about who is a fiduciary, plan sponsors and plan participants have become more aware of what they are paying for their plan and that there are lower cost options available. The bulk of litigation has been about fees, but participants are also getting savvy about the responsibilities their employer has toward them when it comes to their retirement plan.
“I think fee litigation is excessive and sometimes based in reality and sometimes not,” says Iris Tilley, a partner with Barran Liebman LLC, a labor and benefits law firm in Oregon. “A lot of it can be good. It gets people thinking about fees and looking at their retirement plans.”
There is still a set-it-and-forget-it mentality among plan sponsors and plan participants, she says. “A lot of people don’t pay any attention to their retirement plans but then they get annoyed with a downturn when they haven’t changed their plan in years. Anything that can bring people’s attention to their retirement plans is a good thing from that perspective.”
In Tibble v. Edison International, which was decided by the Supreme Court earlier this year, the justices put the burden of obligation on plan sponsors to continually monitor investments in their employer-sponsored plans.
The case was initially filed in 2007 by Glenn Tibble and other petitioners who claimed that their employer offered them higher cost retail-class shares of six mutual funds when identical, lower-cost institutional-share classes were available. The lower courts initially said there was a six-year statute of limitations to file a claim so Tibble couldn’t sue over the funds that were chosen more than six years before the lawsuit was filed.
The Supreme Court disagreed, saying that employers’ duty to monitor investments doesn’t stop after they choose the investments. They need to revisit them periodically, although the justices did not establish how often employers must monitor their retirement plan’s investment menu.
Also see: “SCOTUS decision opens door to more 401(k) lawsuits.”
And the Department of Labor recently settled two cases against employers who had violated the Employee Retirement Income Security Act by not remitting elective deferrals into employee retirement accounts. Instead, the money was comingled in the companies’ general funds and used for other purposes.
“On the mismanagement of the money side, I don’t see a ton of litigation because more companies are using third-party administrators, so they don’t touch the money,” said Tilley.
She adds that companies that do in-house payroll treat it very similarly. When paychecks are cut, they typically submit employee 401(k) contributions to the plan provider at the same time.
“It is a bizarre scenario that they would have money that was supposed to go to the 401(k) sitting in their general assets and being used, which is what happened in these scenarios,” Tilley said. “What I do see are minor errors. Someone forgets to make a 401(k) contribution so it goes in a month or two late. These mismanagement cases to me particularly border on an active purposeful mismanagement as opposed to individual error. Over the course of time it was not that someone forgot to do it. They made the decision to use it for something else.”
Nancy Ross, a partner and ERISA litigator in the Chicago office of Mayer Brown, says that there will always be cases that arise from ERISA provisions. The Supreme Court has seen one or two ERISA cases a year for the past five or more years.
“There’s never been a better time for plan administrators and plan sponsors to take a good hard look at their plan documents,” Ross says. “Make sure they are drafting into them terms that can better position them from getting sued or put them in the best light if they do get sued.”
She also recommends that plans include the names of the plan fiduciaries in the plan documents and review the plan’s investment policy statement.
“Make sure that it is well laid out, that it identifies how you select your investments and that it provides for regular monitoring,” she says.
Also see: “Why every 401(k) plan needs an updated IPS.”
The investment policy statement is the first place the courts will look to see what procedures are in place, but it is up to the company to follow those procedures and document that they are following those procedures, she says.
Retirement plan committees should meet regularly and copious notes should be taken.
“There is no substitution in this day and age for good documentation as to what was discussed at the fiduciary meetings and what was decided. It can’t just be discussed, it also has to be decided,” she says.
A federal appeals court recently affirmed the dismissal of a lawsuit against State Street Bank for failing to prudently manage a General Motors stock fund that was included in two General Motors 401(k) plans. In that case, State Street was an independent fiduciary for the company stock fund, which closed to new investments at one point before it eventually was closed down and the assets were divested, she says.
Because State Street kept such good records of its procedures and the steps it took on behalf of the GM stock fund, the courts said “they absolutely acted as a prudent fiduciary and [the judge] granted summary judgment for State Street,” she says.
Also see: “Verizon follows GM with pension risk reduction.”
“We continue to see some practices where employers are letting their own self-interest get in the way of doing the right thing in their 401(k) plan,” says Schlichter. “Employers need to avoid the temptation to in any way benefit from the 401(k) plan, for example, using the same service provider and getting a better deal for themselves.”
The Department of Labor is in the midst of finalizing its fiduciary rules which will determine who is and isn’t a fiduciary when it comes to investment advice. The proposed rules include brokers, which could impact advisers when they are working with individuals who want to roll over money from a workplace 401(k) plan to an IRA. Hearings and discussions about the rules over the past two years have also brought more attention to how retirement plans are run.
Depending on how the final rules are written, they could also be the source of litigation moving forward, Schlichter believes.
“Hopefully those advisers will put the best interest of their clients first and foremost. If that is done, there won’t be much in the way of litigation. If it is not done, expect there to be some litigation,” he says.
Paula Aven Gladych is a freelance writer based in Denver.
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