4 Tips to Help Protect your Clients from a 401(k) Lawsuit

Nestled within the chaos of 2020 was a significant increase in 401(k) class action lawsuits. At the peak of the Great Recession (2009), there was a dramatic surge of 401(k) litigation and in the wake of COVID-19 we are seeing a similar troublingly trend. Last year alone, the Employee Benefits Security Administration (EBSA) recovered over $3.1 billion in direct payments to plans, participants and beneficiaries, illustrating a 310% increase from 2016 to 2020.[1] Whether this is due to an abundance of “free” time, elevated financial stress or both, plan participants and sponsors are concerned about whether their investments and the expenses in their plans are appropriate. This unrest coupled with the maturing body of ERISA law and an emerging blueprint for filing and litigating cases is a likely cause for this most recent spike.[2]

Courtroom Drama

As the wave of excessive fee claims continues to grow, fiduciaries are at risk, no matter the size of their plan. When excessive fee claims first hit the scene, the primary targets were larger plans but the past few years have shown an uptick in smaller plans. One of the reasons behind the increase may be that more and more excessive fee claims are being filed by law firms that were not previously known in the ERISA litigation space. These new firms can form “cookie cutter” complaints fashioned after cases filed by more experienced firms. For many of these firms, the primary hurdle in bringing an excessive fee claim is the ability to recruit a plan participant to serve as a named plaintiff. But shelter in place, work from home and other COVID measures have employees (or previous employees) more financially stressed and with more time than ever before.

Devoted vs Disengaged

How would you prefer the participants in your plans react when or if a law firm contacts them? Imagine 2 employees: one defers enough to get the full company match, receives targeted messages about financial wellness initiatives and takes advantage of one-on-one advisor meetings and the other reluctantly enrolled in the plan years ago at the minimum deferral and has not checked their balance since. How do you imagine those 2 people react to an attorney fishing for plaintiffs? Wouldn’t you rather have educated and engaged participants?

As a first defense, it might be time to look at key engagement metrics, consider boosting your communication and education resources especially as we recover from the pandemic and return to the office.

Reducing Exposure

There are no silver bullets when it comes to ERISA, so how can you help your plan sponsor clients protect themselves? Because court rulings often hinge on whether fiduciaries follow a “prudent” process, you will not be surprised to learn the following process driven recommendations from Groom Law Group:[3]

  • Establish, follow, and document a robust and prudent process for retaining recordkeepers and determining their fees, including:
    • Periodically solicit RFPs through which a number of Service Providers can submit competing bids for the plan’s business.
    • Benchmark Service Providers fees using an appropriate, independent benchmark.
    • Negotiate fees rather than accepting quoted fees without question.
    • Investigate whether there is any revenue sharing being paid and consider negotiating limits on it.
  • Establish, follow, and document a robust and prudent process for selecting and regularly reviewing plan investments and investment expenses, including:
    • Select appropriate benchmarks for analyzing investment performance net of expense.
    • Follow a consistent process for replacing underperforming investments.
    • Investigate and consider the availability and advisability of using less expensive investment vehicles and share classes.
    • Maintain a diverse portfolio of plan investment options, including index funds.
  • Retain qualified, independent experts to assist with fiduciary decisions – and don’t rely on benchmarks provided by service providers who are justifying their own fees or performance.
  • Document the process and rationale behind any fiduciary decision, being meticulous when deciding to use more expensive products or services and/or when going against expert advice.

Another proactive protection measure you might consider is Fiduciary Liability Insurance. In the event of a fiduciary-related claim or 401(k) lawsuit, fiduciary liability insurance could serve as an extra layer of protection. It covers the legal expenses and financial losses the plan may incur due to errors, omissions or breach of fiduciary duty.

The Right Tools

We too believe that regular benchmarking and unbiased data is key to keeping you and your clients out of trouble. Our Business Management Dashboard is chock full ways to help you support your clients and lower risk of exposure.

To learn more about the Business Management Dashboard, click here.

To schedule a custom demo, email Craig Rosenthal or call 203-405-1853.

[1] Employee Benefits Security Administration. “2020 Fact Sheet: EBSA Monetary Results.” DOL.gov. October 2020.

[2] Wille, Jacklyn. “401(k) Fee Suits Flood Courts, Set for Fivefold Jump in 2020.” Bloomberg Law. Aug. 2020.

[3] Martin, Alison L. and Golumbic, Lars C. “The War on Retirement Plan Fees: Is Anyone Safe?” Chubb & Groom Law Group. May 2020.


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FDI Tools That Can Help

Value and Fee Benchmarking Report, a peer-to-peer evaluation report that shows a comparison of the existing plan to other similar plans and can provide guidance on how changing certain plan features could help the employer offer a more competitive retirement plan benefit.

Our report follows a 5-step process that is fair and repeatable.

  1. Customize the Benchmark Group

    We use numerous factors to build a benchmark group from our proprietary database that is customized for each peer group using mathematical models designed to optimize the degree of accuracy.

  2. Review Service Provider Quality

    The DOL has noted in prior rulings that it is allowable to consider the Quality of the Service Provider when determining Fee Reasonableness. We provide a logical framework to analyze this issue.

  3. Assess Scope of Services

    We examine the scope of services being provided so plan sponsors can understand how the services they are receiving are impacting the cost structures of the service providers.

  4. Examine Value Delivered

    We examine the Value Delivered in terms of helping plan sponsors do their job as a Responsible Plan Fiduciary and to participants in terms of helping them save for retirement.

  5. Evaluate Fees

    Finally, we track and compare fees to the Benchmark Group and to FEEPOINT®. FEEPOINT is a proprietary fee calculation designed to account for fiduciary status, extra services and extra meetings that are not found in the typical plan.

Download a sample Value and Fee Benchmarking report

About Author:

Craig Rosenthal, Head of Strategy and Chief Marketing Officer

Craig is Head of Strategy and Chief Marketing Officer for Fiduciary Decisions. In this role, he is responsible for driving Product and Partnership strategy as well as the overall messaging and marketing for the firm.