Over the last few years, we have seen a significant increase in litigation involving the fees paid by retirement plans. However, until recently, no major litigation had occurred in North Carolina. On March 12, 2014, one of these cases was filed against Winston-Salem-based Novant Health, a large hospital system in the southeast. This case and other recent litigation should serve as a reminder to retirement plan fiduciaries of the need to monitor their plans’ service provider arrangements.

The complaint against Novant Health alleges that Novant’s retirement plan paid unreasonable fees to the plan’s recordkeeper and to an investment advisor. The plaintiffs argue that the fees paid by the plan were unreasonable because, among other things, plan expenses increased more than 10-fold in one year without a corresponding increase in services. The plaintiffs also claim that the fiduciaries breached their duties by failing to leverage the size of the plan to negotiate lower fees and by selecting retail mutual fund share classes when cheaper, “institutional” share classes were available.

While this case is still a long way from being decided, it should serve as a pointed reminder to plan sponsors and other plan fiduciaries that they need to routinely monitor the reasonableness of plan fees and expenses.

If the plan document so provides, a plan can pay its own administrative expenses, but only if the appropriate fiduciary determines that those expenses are reasonable. Before entering into a service provider relationship, the fiduciary must first make a determination that the services are necessary and the fees are reasonable. The fiduciary then must monitor the arrangement over time to ensure that it remains reasonable.

The following fiduciary risk-management practices are worth considering for any plan committee or other fiduciary involved in the selection or monitoring of service providers:

These practices will assist the fiduciary in meeting its fiduciary duties and, perhaps more importantly, demonstrate fiduciary prudence to any inquiring party. Please contact one of our employee benefits attorneys if you have any questions about your fiduciary duties, how to document fiduciary prudence, or any other benefit matter.

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