Plan Sponsor Series #8: "Why Wait Until After You're Sued?"

Originally published by Lance Reising on March 16th, 2019

Fred Reish is a highly esteemed and well-respected ERISA attorney who focuses on fiduciary responsibility, retirement income, and plan operational issues. He has written a series of Best Practice articles for plan sponsors and advisors. The following excerpts are from his Plan Sponsors Best Practices #6.

• "The plan fiduciaries will engage a consulting firm to conduct a Request for Proposal (RFP) for investment consulting firms that are unaffiliated with the plan sponsor and, as a result of that search, will engage an investment consultant to provide independent services to the plan."

There have now been many 401(k) and 403(b) lawsuits by employees against plan sponsors. Most have ended up in large settlements but a few have been dropped as well. When settled, the plan sponsors have generally had to agree to institute certain "best practices" which have been quite consistent between each settlement. Examples from a recent $24,000,000 settlement are below.

A key responsibility of the plan sponsors, the fiduciaries, is to diligently choose and then monitor plan service providers who are to be independent of the plan sponsor.

• "After being selected, the investment consultant must evaluate the plan's investments and provide the fiduciaries with an objective evaluation of those investments."

Two important criteria are the quality of the investment manager and the reasonableness of the expense ratios and any other fees relative to the size of the plan. Actual investment performance should be evaluated with subsequent substitution of any  investments which are not performing within an acceptable range.

• "Another condition is that the committee members participate in an education session regarding their ERISA fiduciary duties."

Two different types of education are recommended. One is a basic education about 401(k) plans because few plan fiduciaries understand all the workings of a plan. The other is a follow up education annually to get caught up on any current developments.

• "The settlement agreement goes on to require that all payments from the investments (including 12b-1 fees, sub-TA fees, or other compensation that any of the investments pay to the plan's recordkeeper) be restored to the accounts of the participants. In other words, all revenue attributable to the plan's investments must be paid to the accounts of the participants who held the investments that made the payments. This is sometimes referred to as "equalization.""

It should be noted that equalization is not legally required, but where plan expenses are paid through the investments, known as revenue sharing, the true costs are not very transparent and the propensity for a service provider being overpaid is high.

Revenue sharing makes the plan fiduciaries' job of monitoring the expenses for reasonableness very difficult. It also makes the total plan costs disproportionately paid by those participants who choose investments with higher expense ratios.

"If plan committees implemented the steps described in this settlement agreement, they will go a long way towards limiting their liability . . . and probably towards producing a higher-quality, lower-cost 401(k) plan for the employees. These aren't the only steps that should be taken, but they are a good start."

"Forewarned is forearmed. The plaintiff's attorneys are paying attention to these issues; you should be, too."

-Fred Reish