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How 401(k) Plan Sponsors Can Avoid the Coming Onslaught of Lawsuits

Stay focused on the triple Fs: fees, funds and fiduciary.

The surge in lawsuits against 401(k) and 403(b) plans over the past five years has been mostly focused on plans with at least $1 billion in plan assets for obvious reasons: The more money and participants, the larger the potential settlement or damages. But regional personal injury attorneys are sure to copy the claims and filings against larger plans happy and willing to get smaller settlements as these organizations are less likely to fight.

So what can plan sponsors do to protect themselves?

The most important decision a small to midsize defined contribution plan sponsor makes is selecting the right advisor. While there are fewer dabblers or blind squirrels, many of the more experienced retirement plan advisors are still focused on the Triple Fs or fees, funds and fiduciary, which has become commoditized leading to declining fees just as basic record-keeping service fees have dropped.

But before we go too deep about RPA issues, let's review simple and relatively easy ways that RPAs can help clients protect against lawsuits:

  • Fees – There are three main types of fees to focus on, including:
    • Record-keeping: A solid first step is to make sure that the plan has received, read and fully understands its 408b2 (plan) and 404a5 (participant). Plans should be benchmarking fees regularly and going to market with an RFP periodically, which will vary depending on the size and complexity of the plan and changes to the organization or the DC industry like when a provider is acquired.
    • Investments: Though it’s relatively easy to get data, making sure that plans are optimizing share class, which could include the availability of collective trusts, is more complex. Using active investments requires review of results and justifications for paying more than index funds, which should be in the investment policy statement, another hedge. Some passive investments may be high priced when compared with other peers.
    • Advisory services: Just as with other providers paid out of plan assets, a documented due diligence must be conducted. Advisors usually help with benchmarking and going to market for investments and record-keeping, but they cannot be relied upon to conduct unbiased due diligence on themselves. Using a third party who must recuse themselves from being hired is the only way that plans can really protect themselves.
  • Cybersecurity – Along with making sure that all providers have protection to safeguard sensitive data and access to systems as outlined by the Department of Labor, plans need to make sure that these providers have insurance against hacks, which will indemnify the plan and participants carefully reviewing exclusions. Each participant that is hacked is a potential lawsuit.
  • Fiduciary Insurance – Though Euclid claims that fiduciary insurance costs have not risen, deductibles are higher and limits have decreased, which is basically the same thing. Either way, it is prudent to have fiduciary insurance to protect the company and members of the retirement committee.
  • Education and Training – At a minimum, the committee should receive training and access to self-study for new members as well as education for staff responsible for the day to day. Though participant education has not proved effective, access should be provided as well as group and one-on-one meetings.
  • Outcomes – While good participant outcomes will not insulate plans from liability, just as good investment performance is not an absolute defense, it’s important which can be accomplished through the ideal or auto-plan.

The biggest blind spot for plan sponsors, which is also the most important decision, is the selection and due diligence on their RPA. Most plans do not understand what to expect from their advisor, how to find a good one for their plan or conduct proper, unbiased due diligence. There are limited resources and RPAs who tell their plans that they can conduct prudent due diligence on themselves or, even worse, that it is not necessary, are opening themselves up to more enlightened competitors.

Along with proper documentation, ensure that fees are reasonable and that the plan is designed in the sole interest of participants, avoiding conflicts of interest and receiving proper disclosure from third parties are basic and common-sense ways to avoid liability. Easier said than done, as more RPAs start offering proprietary investments and participant services.

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