As an employer with a company-sponsored retirement plan, you have a fiduciary responsibility to act in the best interests of your employees. This includes ensuring that the plan is administered in accordance with all applicable laws and regulations. In recent years, there has been an increase in lawsuits filed by participants against plan sponsors alleging breach of fiduciary duty, among other claims. These lawsuits can be costly and time-consuming, so it is important that everyone take steps to protect themselves.
Here are three ways an employer with a company-sponsored retirement plan can improve their fiduciary oversight and minimize risk of litigation:
1. Monitor plan fees and expenses:
Plan sponsors must ensure that plan fees and expenses are reasonable and necessary for the operation of the plan. This includes monitoring investment fees and expenses, recordkeeping fees, and other administrative expenses. By regularly reviewing and benchmarking fees and expenses, plan sponsors can demonstrate that they are acting prudently and in the best interests of their employees.
2. Provide regular employee education / financial wellness:
Many lawsuits filed by employees allege that plan sponsors failed to adequately educate employees about the plan and investment options. Plan sponsors should provide regular education to employees about the plan, including its features, investment options, and fees and expenses. This includes ensuring all notices are delivered as required and in a timely manner. By providing this information, plan sponsors can help employees make informed decisions and avoid potential lawsuits.
3. Review investment options:
Plan sponsors must ensure that investment options offered in the plan are diversified and appropriate for the employees. This includes reviewing investment options periodically to ensure that they continue to meet appropriate criteria that would align with a Plan’s Investment Policy Statement and, generally accepted investment philosophies. By regularly reviewing investment options, plan sponsors can demonstrate that they are acting prudently and in the best interests of their employees.
In addition to these three ways, plan sponsors should also work with their service providers to ensure that they are acting in the best interests of the plan and its employees. This includes regularly reviewing service provider agreements and fees, as well as monitoring their performance.
There are several reasons why there has been an increase in retirement plan sponsor lawsuits in recent years. One main reason is increased scrutiny and enforcement by regulatory bodies such as the Department of Labor (DOL) and the Securities and Exchange Commission (SEC). These agencies have been focused on ensuring that retirement plans are being operated in the best interests of employees and beneficiaries.
Another reason is the changing nature of retirement plans themselves. As retirement plans have become more complex and sophisticated, there are more opportunities for errors or mismanagement, leading to potential lawsuits. In addition, many employees have become more aware of their rights and the potential for lawsuits, leading to increased litigation.
The rise of class action lawsuits has also contributed to the increase in retirement plan sponsor lawsuits. Class action lawsuits allow multiple employees to sue a plan sponsor as a group, increasing the potential damages and making it more cost-effective for employees to bring a lawsuit.
Some of the potential lawsuits against retirement plan sponsors include:
1. Breach of Fiduciary Duty:
Plan sponsors have a fiduciary responsibility to act in the best interest of their plan participants. Lawsuits may arise when plan sponsors breach this duty by failing to monitor plan fees, offer a diversified range of investment options, or properly disclose plan information. A recent example is the lawsuit filed against 401(k) plan sponsor, General Electric, which was accused of a breach of fiduciary duty by offering proprietary funds in the plan that underperformed compared to their benchmarks. The case was settled for $40 million.
2. Excessive Fees:
Plan sponsors may be sued if they fail to negotiate fees and expenses, resulting in participants paying excessive fees. This can include investment fees, record-keeping fees, and administrative fees. In 2020, Walmart and its plan administrator, Merrill Lynch were sued by its employees for allegedly offering high-cost, underperforming investments in their 401(k) plan, resulting in excessive fees. The case settled for $13.5 million.
3. Participant Communication:
Plan sponsors have a responsibility to provide clear and complete information to plan participants. Lawsuits can arise when plan sponsors fail to communicate information about plan fees, investment options, and other plan features. In this case, participants in a retirement plan sponsored by Estee Lauder alleged that the plan administrators had breached their fiduciary duty by failing to provide adequate communication and education to plan participants. Specifically, the plaintiffs claimed that the plan administrators had not properly disclosed fees and expenses associated with the plan, causing participants to pay excessive fees.
It's worth noting that these are just a few examples of lawsuits and there are many other types of claims that plan sponsors may face. Also, there are many cases such as this lawsuit against BlackRock that was dismissed (twice) alleging a fiduciary breach brought by an employee and former plan participant, Andre Hall, and current employee and plan participant, Jermaine Minitee.
All companies must take steps to protect themselves and be aware of the potential risks and take steps to minimize their exposure to lawsuits. Plan sponsors must work with their service providers to ensure that they are always acting in the best interests of the plan and its employees.