A plaintiff’s law firm recently filed class action lawsuits against a number of large employers alleging that the employers, members of their boards of directors and other fiduciaries violated ERISA by, in essence, causing their 401(k) plans to pay unreasonable fees to service providers.  The complaints are very broad, and they do not make specific factual allegations to support the claims.  It appears that the plaintiffs intend to use the discovery process to find the facts to prove their cases. 

Plan sponsors should be concerned because this type of suit could be brought against any plan sponsor, large or small.  Once a lawsuit has been filed, a defendant’s risk of an adverse outcome will largely depend on the quality of the defendant’s 401(k) plan records.  If the defendant cannot produce records showing that the fiduciaries followed a logical process in selecting and monitoring the service providers, the defense of the case will be more difficult and expensive.

An effective defense against these suits begins with the plan sponsor’s recognition of its duties with respect to the selection and monitoring of 401(k) plan service providers.  In the words of the Department of Labor, plan fiduciaries have an obligation under ERISA “to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable.”  Regarding fees, the Department has emphasized that the responsible plan fiduciaries must assure that the compensation paid directly or indirectly by the plan to the provider is reasonable, taking into account the services provided to the plan as well as any other fees or compensation (such as revenue sharing) received by the provider in connection with the investment of plan assets.

401(k) plans come in different shapes and sizes, and for this reason there is no one formula for satisfying the plan sponsor’s fiduciary duties.  As a general rule, ERISA requires the fiduciaries to engage in a prudent process that is appropriate to the issue in question and to the surrounding circumstances.  A decision-making process that is considered prudent for a small plan with $1 million in assets will not necessarily be sufficient for a larger plan.  Depending on the size of the plan, appropriate vendor selection procedures might include a competitive “request for proposal” (RFP) process conducted by an independent consultant.  Many plan sponsors that have used the RFP approach have been surprised, even shocked, by how much they were able to reduce plan expenses while at the same time improving the level of service!

More often than not, the outcome of a lawsuit alleging breach of fiduciary duties under ERISA will turn on the fiduciary’s procedures and documentation, rather than the decisions that were made.  The same is likely to be true of the recent suits over 401(k) plan fees.  Thus, plan sponsors should review their 401(k) plan procedures for making fiduciary decisions and evaluate whether the procedures are appropriate under the circumstances.  Issues to explore include (but are not limited to):

• Whether there is documentation clearly identifying directors, officers and employees responsible for making fiduciary decisions (e.g., a charter for the plan administration committee);

• Whether the appropriate individuals have been appointed to make fiduciary decisions (i.e., do they have the necessary skills and experience);

• Whether there are procedures in place for making decisions, particularly the selection and monitoring of vendors and investments;

• Whether existing vendor compensation arrangements are transparent and completely understood by the fiduciaries;

• Whether outside brokers or consultants advising the plan fiduciaries have a financial interest in the fiduciary decisions (i.e., is there a potential conflict of interest); and

• Whether procedures and decisions are adequately documented.