Compliance October 19, 2017

PANC 2017: Lessons in Litigation

Panelists at the 2017 PLANADVISER National Conference discuss the state of litigation in the retirement plan industry and lessons learned by decisions.
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Thomas E. Clark Jr., a partner in The Wagner Law Group, told attendees of the 2017 PLANADVISER National Conference, Thursday, that litigation in the retirement plan market is strong.

New firms have jumped into the fray, following the model of Schlichter Bogard & Denton, a firm that has been bringing lawsuits against retirement plans and providers for years. “There are a half dozen of these firms filing complaints,” Clark observed.

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David Kaleda, a principal at Groom Law Group, Chartered, added that law firms are getting creative—moving down-market and to very large 403(b) plans. “It’s a good way to get lots in recoveries,” he said.

But, Clark said, for smaller plans, the plaintiffs’ bar will realize it has “caught the bumper” and won’t get a payout to compensate for what it pays to litigate. He believes, going forward, small plans will not see much litigation.

From cases that have been filed and decided, there are lessons to be learned. According to Clark, decisions in self-dealing cases are turning into process claims, which say, “You should have done something.” However, this doesn’t mean a plan sponsor or defendants have violated the Employee Retirement Income Security Act (ERISA).

Kaleda noted that Fidelity was dismissed from the Verizon excessive fee case. “Service providers are targets of suits because they have the deepest pockets. But they are usually not fiduciaries and not responsible for alleged claims,” he said. “Recordkeepers usually make sure they are not fiduciaries, but the plaintiffs’ bar [has] tried to make cases showing they are.”

For example, Kaleda said, in the Delta case citing Fidelity and Financial Engines, where the plan sponsor offered a managed account program Fidelity sponsors, the court said Fidelity did not act as a fiduciary when it set its compensation structure for a chosen plan sponsor service. Kaleda explained that providers can get into trouble making recommendations that create compensation for themselves, but setting a fee structure for services that plan sponsors agree on is not a violation of a fiduciary function.

Kaleda said decisions in other lawsuits have shown that plan sponsors and advisers just need to show there were fiduciary processes in place for selecting and monitoring investments and providers.

Regarding the cases challenging the church plan status of entities’ pension plans, Kaleda said the Supreme Court decision was helpful in ruling that a church plan need not be sponsored by a church, but may be sponsored by a principle purpose organization. However, organizations still have to worry about litigation because the high court did not spell out what is a “principle purpose organization,” what is a “church,” and what does it mean to be affiliated with a church. He added that plaintiffs are amending complaints to show the entities in question were not principle purpose organizations or church-affiliated.

There have been settlements in some of these cases, Kaleda noted, but the defendants have refused to say they are subject to ERISA—they are agreeing to additional funding of pension plans to make participants happy, according to Kaleda.

Clark believes the decisive answers to church plan litigation questions will have to come from Congress.
Data & Research October 18, 2017

Plan Committees Consider Monitoring Investments the No. 1 Priority

Adhering to plan governance and minimizing plan risk are the next priorities.
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Callan Institute took a look at the practices of retirement plan committees to find out what they are doing right and what they could be doing better. Callan discovered that plans with more than 10,000 participants are more likely to have both an investment and an administrative committee, while plans with less than 10,000 participants tend to have a single committee.

Among investment and single committees, members consider monitoring the fund lineup to be their No. 1 priority, Callan said in its report, “It Takes a Committee: The Best Ways to Govern DC Plans.” These committees then ranked adhering to plan governance and minimizing plan risk as their No. 2 priorities. Among administrative and single committees, the first priority was tied between plan governance and process and participant retirement readiness.

Key findings from Callan’s survey reveal that committees should not become too large, i.e. more than seven people. When they do, lines of responsibility become blurred. Because committees vote, it is better to have an odd number rather than an even number of members. Not all committees give their members fiduciary training, which, Callan says, is imperative. Callan also recommends that the head of the committee, who understands the strategic objectives of the plan, set the committee agenda, rather than the committee members.

On average, investment committees tend to have six to seven members. Administrative committees tend to have five or fewer members, and single committees have anywhere from four to seven members, Callan found. The institute also advises that committees hire people by their job function rather than by their job title. This, Callan says, “streamlines the nomination process in the event of turnover or organizational restructuring, where a specific job title may be unfilled for a period of time or even cease to exist.”

Callan also says that members of the C-suite, such as a firm’s general counsel or chief financial officer, should not be voting members, as they might have conflicts with insider information. It may be desirable to include HRIS staff, not necessarily as a voting member, when decisions made by the committee(s) may affect payroll and HR technology programming or other benefits within the organization. Callan also suggests that committees set term limits for up to seven years for members, so that while committees can benefit from those with experience, they incorporate people who can lend new insights, and that these terms be staggered, so that the committee enjoys the benefits of both perspectives at any given time.

The most common number of committee meetings a year was four, which Callan recommends. Callan also says that “fiduciary training is vital for committees to operate efficiently and safely. Comprehensive fiduciary training is warranted at the formation of a committee, for new members and as a refresh for all committees at least every few years.”

Committee members believe they are doing an effective job; on a scale of one to five, with five being the most effective, investment committees ranked themselves as 4.6 on average, administrative committees 4.7, and single committees 4.5. Callan’s report can be downloaded here.

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