In August of 2016, seven universities received fiduciary liability class action lawsuits. These lawsuits were all filed by the same law firm and allege breaches of fiduciary duty related to the selection and use of higher-cost and poorer performing investment options, the payment of excessive fees for plan record keeping services, and potential conflicts of interest related to selecting providers. The lawsuits argue that all of these fiduciary breaches caused the plan participants to pay more of their retirement accounts than is necessary in increased fees and/or reduced earnings.
There have been several similar lawsuits filed against a number of plan sponsors over the year. The damages awarded in these cases have amounted to millions in damages that were paid by the plan sponsor. These new lawsuits have specifically targeted 403b plans and higher education. How much do you know about your fiduciary responsibility related to your plan? The Employee Retirement Income Security Act of 1974 (ERISA) includes five responsibilities that fiduciaries have to plan:
- Acting solely in the interest of plan participants and their beneficiaries,
- Carrying out their duties prudently,
- Following the plan documents,
- Diversifying plan investments, and
- Paying only reasonable plan expenses
The two allegations in the 403b lawsuits relate to acting solely in the best interest of plan participants and their beneficiaries and paying only reasonable plan expenses. The question is how do you as the plan sponsor protect yourself against these allegations. Ask yourself the following questions:
- Do you have a committee charged with oversight of the plan?
- If so, how often does the committee meet?
- Are there written minutes of the decisions made by the committee?
- Has the committee reviewed the plan fees, investment options, and plan operations and documented decisions made for these items?
- Does the committee understand who all of the service providers are for the plan, how much these providers are paid, and how they are being paid?
These is no protection that will keep you from being involved in a lawsuit, but being prepared can help reduce the cost of a lawsuit and protect against damages. Having the proper documentation is one way to protect yourself in the event that you do become a party in a lawsuit. Plan sponsors should consider hiring qualified, experienced services providers, including investment advisors and third-party administrators. You should make sure you understand what duties these providers will perform and how they can help protect you.