Staying Out of Court: A Plan Sponsor’s Guide to Protecting Yourself from Fiduciary Lawsuits

By now, most business owners understand that offering a company retirement plan creates some liability, but are you really clear on exactly what you’re responsible for? The defendants involved in the fiduciary lawsuits of Tibble v. Edison International and Sacerdote v. New York University found out the hard way. A close look at the details of each these cases brings to light some valuable lessons all employers can use to help keep their company retirement plans complaint and keep themselves of the courtroom.

Tibble v. Edison International: Establishment of Continuing Fiduciary Duty

Back in 2007, participants in the Edison International 401(k) plan filed a lawsuit against their employer. They alleged a breach of Fiduciary duty under the rules laid out in the Employee Retirement Income Security Act (ERISA). In their claim, they stated that the investment options in the plan consisted of mutual funds that were readily available in lower-cost share classes, and that the extra expenses negatively impacted their investment returns.

Because the fund line-up was chosen in 1999 and the suit wasn’t filed until 2007, the case was dismissed based on the six-year statute of limitations under ERISA law. However, in a unanimous decision issued in May of 2015, the U.S. Supreme Court ruled that employers offering a company retirement plan have a continuing fiduciary duty to monitor the investment options offered to participating employees. This means that employees can file suit within six years from the time a plan sponsor failed to monitor the investment selections or remove an inappropriate investment from the line-up, not from the time the investments are initially selected.

The Tibble v. Edison International ruling also outlined specific guidelines for plan sponsor responsibilities as follows:

1. Plan sponsors must initially select investment options which they believe to be prudent or retain a qualified investment fiduciary to assist in the process.
2. Once you choose the investment options, there is a separate duty to continually monitor them, ensuring that they remain the most prudent options.
3. If an investment option becomes imprudent, the plan sponsor or investment fiduciary has a duty to remove it and replace it with an appropriate alternative.
4. To prove that you’re meeting your duty to continually monitor the investments, you must have a regular review process in place.

The Takeaway: Best Practices

To comply with these court-ordered requirements, plan sponsors need to take a second look at their current practices. If it’s been a while since your last investment review, now is the time to initiate one. Don’t make the mistake of assuming your recordkeeper or custodian is handling this for you. In most cases, these parties do not serve as fiduciaries on company retirement plans.

Also, ensure that you have a clearly defined process in place to periodically review your plan’s investment options. This review should include taking a deep dive into the investment’s performance, fees, available disclosures, and any significant changes such as a new investment manager. You may consider establishing an investment review committee or hiring an outsourced administrative fiduciary to handle these regular periodic reviews for you.

Sacerdote v. New York University: The Need for a Disciplined Review Process

In the 2018 case of Sacerdote v. New York University, the courts ruled in favor of the plan fiduciaries, despite finding some “deficiencies” in a few of the committee members. Some of the committee members were unsure what their responsibilities were or how to execute on them. This is just a recipe for disaster. However, there were two primary factors that led to the courts to rule for the defendants in this case. The first was that the committee had some informed and engaged members who knew that hiring outside professionals to assist in the maintenance of their plan was the smart thing to do.

The second, and possibly most important, saving grace was the committee’s disciplined review process. Many of the allegations brought up in the case were countered by referencing detailed documentation of how decisions were reached.

The Takeaway: Best Practices

Plan sponsors can take a lesson from the New York University investment committee by adopting the following practices:

1. Schedule Periodic Plan Reviews

Plan sponsors and investment committees are required to review the details of your retirement plan as frequently as necessary to properly do the job. Meetings should be held no less than annually, while quarterly reviews are ideal.

2. Hire Expert Professional(s)

Although this is not a requirement, it’s hiring an expert to help monitor your plan is a best practice. Lacking the necessary expertise to make prudent decisions and documenting those decisions does not excuse you or your committee members from the duty to do so. Working with a professional co-fiduciary shows that you’re putting forth your best effort to ensure plan compliance.

3. Adopt and Follow an Investment Policy Statement

Following an Investment Policy Statement (IPS) is also not a legal requirement but rather a best practice. This document explains the investment selection process and serves as a guideline for your investment committee. Investment options that are consistent with the written IPS are more likely to stand up to legal scrutiny.

4. Carefully Select and Educate Committee Members

Although the courts ultimately ruled in favor of NYU, they did criticize the performance of some of the committee members. When selecting your investment committee members, ensure they’re willing to stay engaged and fully understand the level of fiduciary responsibility they’ve accepted. Periodically review the performance of your committee members and make adjustments as needed.

If you’re a small business who doesn’t have a retirement plan committee, taking on these responsibilities alone can be risky. For instance, it was a disgruntled employee that initiated two important cases, Tibble v. Edison International and Sacerdote v. New York University. These cases created a huge disruption for these businesses. It makes sense to do it right the first time.

What’s Your a Plan for Avoiding Fiduciary Lawsuits?

If you want to avoid fiduciary lawsuits, you must have a clear understanding of your responsibilities as a plan sponsor. Under ERISA laws, plan fiduciaries have a duty to select prudent investment options that are in the sole interest of all plan participants and beneficiaries. These options should allow for diversification to avoid the risk of large losses and should remain in line with plan documents. The rules do not define a right or wrong way to choose the investments, but they do require that you have a prudent process for arriving at your decisions.

The unfortunate fact is that 401k lawsuits are not uncommon. Do you have a solid plan in place to keep yourself out of the courtroom? If you aren’t able to answer this question with 100 percent confidence, it’s time to take action. Contact FiduciaryShield today to schedule a plan review.