Plan investments, especially expenses charged by investment vehicles, were the focus of most benefits-related litigation in 2015. Three high-profile cases, like Caterpillar several years ago, had large settlements that included fiduciary reviews and independent oversight of investment and other plan decisions.
- Lockheed Martin settled a participant lawsuit over excessive plan fees (and several other investment-related allegations) for $62 million.
Ameriprise Financial settled its excessive fees case for $27.5 million.
Boeing settled a similar lawsuit for $75 million.
It may be premature to think a tidal wave of 401(k) plan participant lawsuits is beginning, but the number of settlements and rulings favorable to plaintiffs has increased. Plan sponsors should consider ways to manage risk including:
Establishing a formal plan committee that meets regularly to consider investments and other plan fiduciary decisions.
Carefully and regularly reviewing how the fees their plans pay stack up against peer-group plans.
Documenting plan fee reviews and how decisions involving plan fees are made.
Considering employing independent specialists (such as consulting advisers or a Registered Investment Advisor) to provide guidance and oversight. In most large settlements such as the ones previously listed, the plan sponsors agreed to employ independent oversight and other structural changes.
Here are three more lessons for plan fiduciaries.
1. Make plan investment decisions carefully
The Supreme Court ruled unanimously in Tibble v. Edison International
that Edison’s decision to retain a plan investment was subject to the same fiduciary standards as its initial decision to make the investment. Plaintiffs alleged that the plan’s fiduciaries retained certain high-fee plan investments when identical and less-expensive investment alternatives were available. The Supreme Court held that Edison had a fiduciary duty to continually monitor existing plan investments and that this duty was as important as the due diligence when the investments were originally selected.
Plan fiduciaries may pay some attention to existing investments, but it’s typically less than the attention paid when the investments were selected. For example, most experienced fiduciaries understand that an investment’s performance relative to that of its peers may degrade over time, but those same fiduciaries may not focus as much on factors such as the availability of lower-cost versions of the investment as market forces drive prices down.
Plan fiduciaries should regularly monitor and document issues like the following:
2. Understand that certain high-risk investments attract litigation
Standard statistical measures of risk versus return that compare the investment to similar types of investments (fiduciaries should consult an investment professional as much while monitoring as they did when selecting an investment)
The way the investment is managed should be consistent in style, diversification and so on with the way it was managed when it was first selected (if the investment’s type or style changes, it may no longer properly contribute to the diversification of the plan’s overall investments)
New offerings of the same or similar investments with lower expenses
Complicated, highly customized or high-risk investments — including hedge funds, customized target-date funds and specialty investments — can attract participant litigation. These cases show the need for care and due diligence with unusual or customized investment vehicles in participant-directed retirement plans. Beyond the optics in not using a “name brand” investment vehicle, there may also be technical concerns concerning risk and performance measurement against peer investments, effective communication of the risk and return characteristics of the investment to participants, expenses and general suitability of the investment for a retirement plan.
Fiduciaries should develop and distribute to participants the same investment information for specialized investments as is available for listed mutual funds, for example. Fiduciaries should consider obtaining a second opinion from an independent investment adviser and carefully monitor the investment once it’s in the plan.
3. Realize that plan investment in employer stock may be scrutinized
Several lawsuits filed in 2015 focused on plan investments in employer securities, on the heels of the Supreme Court’s 2014 ruling in Fifth Third Bancorp v. Dudenhoeffer
finding that plan fiduciaries may no longer benefit from the presumption that their decisions were prudent.
In these lawsuits, the value of the employer’s stock suddenly drops and plaintiffs may allege that the plan’s fiduciaries had a conflict of interest or didn’t act on information available to them (among other things) while continuing to retain the stock as a plan investment.
While the rulings in several recent cases held that fiduciaries who followed a prudent process concerning employer stock were acting prudently, they remind us that the risk of litigation over employer stock as a plan investment usually exceeds the risk for other types of plan investments.
The courts noted several factors favoring the fiduciaries that other fiduciaries should consider adopting. These include:
Closely and frequently monitoring whether the plan should continue to retain the stock.
Obtaining professional, independent advice regarding investment in the employer’s stock.
Maintaining documented transparency regarding fiduciaries’ access to nonpublic information about the employer’s financial performance and the possibility of events that could cause a sudden drop in the stock’s price.
Applying the same investment performance analytics to employer stock that would be applied to any investment.
Ensuring that participant communications and investment decisions are always informed by awareness that an employer stock fund is inherently more volatile than more-diversified investment alternatives, which affects the investments’ risk and return characteristics.
Plan fiduciaries should learn from recent lawsuits, carefully considering expenses related to investment decisions, following robust fiduciary procedures and thoroughly documenting the decision-making process.
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