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A prudent process and documentation is more essential than ever. There\u2019s no time like the present to make sure you and your investment committee have a strong fiduciary file and continue to try to raise the bar. (Photo: Shutterstock)\n<\/figure>\n
While retirement plans with billions of dollars dominate the plan litigation headlines, smaller plans have the opportunity to learn from the suits filed against their larger plan peers and hopefully avoid possible litigation.<\/p>\n
Until recently, the fee-based claims against retirement plan fiduciaries targeted \u201cmega-plans\u201d \u2014 for example, Verizon ($30B); Chevron ($19B); Intel ($15B); Oracle ($11B); American Airlines ($9B) \u2014 but two cases may indicate an extension of fee based claims into the small\/mid-size plan market: CheckSmart ($25M) and LaMettry\u2019s Collision ($9M).<\/p>\n
There is no doubt that litigators have been busy. We are seeing new approaches to court cases \u2014 whether an attack on revenue sharing, continued focus on company stock, or new inquiries into stable value, fee structures, or custom target-date funds (TDFs) \u2014 litigation doesn\u2019t show signs of letting up.<\/p>\n
The suits attack plan sponsors, recordkeepers and, in some cases, investment managers. Recent cases bring a number of new attorney names into the litigation world as new entrants in the plaintiff attorney world continues to grow. The pace is unlikely to slow as cases are quickly duplicated.<\/p>\n
Unfortunately, we are in a world where every action can be put under the microscope.<\/p>\n
Committees should feel confident that, if they follow fiduciary best practices and due diligence, they have a strong defense. A prudent process and documentation is more essential than ever. There\u2019s no time like the present to make sure you and your investment committee have a strong fiduciary file and continue to try to raise the bar.<\/p>\n
While the fees, penalties and settlements of the cases mentioned above amount to huge sums, the actions that prompted these lawsuits are not unique to the handful of companies being charged.\u00a0 Plan sponsors should be taking copious notes and learning lessons from this litigation.<\/p>\n
Since it\u2019s hard to predict what\u2019s going to happen in the courts, plan sponsors should look to reduce the risk of litigation by following a best-practices strategy. Some key steps that sponsors can take to improve the plan for participants and protect themselves as fiduciaries include the 11 tips below:<\/p>\n
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- Keep\u00a0your ear to the ground. <\/strong>Know what is going on within the industry and what a prudent person would do.<\/li>\n
- Benchmark and evaluate your providers<\/strong>. Even if a plan is satisfied with its current provider, consider periodically benchmarking or going out to bid with a Request for Proposal (RFP). The RFP process may disclose administrative and cost saving opportunities. Ensure that provider fees and expenses are reasonable by evaluating competitive bids every few years. An RFP process may uncover whether you are overpaying for services and whether other competitors might be providing useful additional services that your current provider does not offer.\u00a0 At the end of the exercise you may not be dissatisfied with your current provider, but at the least, you will know whether you should be renegotiating your current provider\u2019s fees.<\/li>\n
- Offer a broad mix of investment options.\u00a0 <\/strong>This will allow participants to adequately diversify their accounts. The menu should include low-cost index funds. Ask yourself, \u201cIs a competitive capital preservation investment option available, and has the investment been thoroughly vetted?\u201d<\/li>\n
- Engage in fiduciary training. <\/strong>It is imperative that all committees understand the legal responsibilities of their position as a fiduciary.<\/li>\n
- Review the cost and structure of your investments. <\/strong>A committee (or other fiduciary) should document that it regularly investigates share classes and fee options to ensure that it has considered the lowest cost option for which it qualifies. If higher cost funds are selected, a committee (or other fiduciary) should document the process that led to the selection of a higher cost fund as opposed to a cheaper fund \u2013 e.g., documenting the relative performance of the higher cost funds net of fees. Ensure fee transparency and equality for employees.<\/li>\n
- Follow your governing documents. <\/strong>\u00a0Plans should adopt an Investment Policy Statement and follow it. Adopting a policy and not following it can be worse than not having a written policy at all.\u00a0 Modify or update the policy as appropriate.<\/li>\n
- Watch the proprietary funds. <\/strong>\u00a0Recent litigation has focused on providers who put their own funds in their employee plans even though they were not top performers.\u00a0Ensure that you evaluate all investments options, using an unbiased, well-documented process that can reliably evaluate how well each option is aligned to your plan\u2019s needs and demonstrate the prudence of your decisions.<\/li>\n
- Hire expertise<\/strong>.\u00a0 Unless you are a very large business with employees who have real expertise and time to spend, you are courting disaster by trying to do everything in house.\u00a0Just about every plan needs professionals advising about investments and fees.\u00a0 And those professionals should acknowledge that they are fiduciaries.<\/li>\n
- Monitor your revenue arrangements.\u00a0 <\/strong>There are alternatives to paying for plan services through revenue sharing that are more transparent. If you do enter into a revenue sharing arrangement, make sure your provider isnot being overpaid or that revenue sharing is not being used to pay for services to the plan sponsor rather than the plan participants.<\/li>\n
- Continue to monitor the Plan investments.<\/strong>\u00a0 Just because you picked an appropriate menu years ago does not mean your menu is the best for participants today.\u00a0 Fiduciaries need to monitor performance against benchmarks and to be aware of new funds and alternatives to regular mutual funds, such as separate accounts and collective investment funds.<\/li>\n
- Hold regular committee meetings.<\/strong>\u00a0 Prepare agendas and keep written minutes to record what is discussed and the reasons for decisions. Careful documentation makes it much easier to show a court that you were acting prudently. Make sure your notes are thorough.<\/li>\n<\/ol>\n
One of the most dangerous statements that can be made is, \u201cWe have always done it this way.\u201d \u00a0Plan sponsors now have a unique opportunity to learn valuable lessons from these lawsuits and court cases and adopt best practices for managing their fiduciary processes and responsibilities.<\/p>\n
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Gordon Tewell, CFA, CPC, ERPA is a principal and consultant at Innovest Portfolio Solutions<\/a>.\u00a0 He is a member of Innovest\u2019s Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiencies for our retirement plan clients. At Innovest, Gordon provides institutional consulting services to committees and boards of various types of retirement plans, both corporate and public-sector.<\/p>\n<\/p><\/div>\n
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<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"A prudent process and documentation is more essential than ever. There\u2019s no time like the present to make sure you and your investment committee have a strong fiduciary file and continue to try to raise the bar. (Photo: Shutterstock) While retirement plans with billions of dollars dominate the plan litigation headlines, smaller plans have the … <\/p>\n
- Benchmark and evaluate your providers<\/strong>. Even if a plan is satisfied with its current provider, consider periodically benchmarking or going out to bid with a Request for Proposal (RFP). The RFP process may disclose administrative and cost saving opportunities. Ensure that provider fees and expenses are reasonable by evaluating competitive bids every few years. An RFP process may uncover whether you are overpaying for services and whether other competitors might be providing useful additional services that your current provider does not offer.\u00a0 At the end of the exercise you may not be dissatisfied with your current provider, but at the least, you will know whether you should be renegotiating your current provider\u2019s fees.<\/li>\n