On Small Plans and Large
Art by Tim Bower
Classes of participants in self-directed defined contribution (DC) retirement plans subject to the fiduciary duty provisions of the Employee Retirement Income Security Act (ERISA) have, for over 15 years, been suing their plan fiduciaries and service providers for breach of those duties. The focus of the allegations has been that the participants’ plan investments are too expensive and that the plan pays too much for recordkeeping fees.
Participants tended to file these suits against fiduciaries of plans with at least $1 billion of assets under management (AUM). However, during the past few months, we’ve seen a trend in class action lawsuits brought against smaller plans. These cases should remind plan fiduciaries and their advisers that ERISA applies to all plans, regardless of size, and that there are steps a fiduciary can take to mitigate fiduciary risk.
In Buescher v. Brenntag North America, Inc., which was filed this January 8 in the Eastern District of Pennsylvania, the participants of a plan with approximately $440 million in assets brought breach of fiduciary duty claims against the sponsor and named fiduciaries. The claims were the same as those found in suits brought against larger plans. For example, the participants alleged the plan could have substantially saved on investment fees by investing in collective trusts and separate accounts in lieu of mutual funds. Additionally, they alleged that the defendants failed to make lower-cost mutual fund share classes available. The participants also alleged that plan fiduciaries failed to prudently manage the plan’s recordkeeping costs.
In four other cases filed since last November, participants brought ERISA breach of fiduciary duty suits against plans with $335 million in assets, $300 million in assets, $180 million in assets and $52 million in assets. The plaintiffs alleged breach of ERISA fiduciary duty claims similar to those found in the Brenntag case. Further, in Savage v. Sutherland Global Services, Inc., the plaintiffs claimed that the fiduciaries of another $52 million plan failed to offer a prudent mix of investments.
These cases highlight that some law firms appear to be increasingly willing to represent participants in plans that are smaller than the mega plans. The firms involved with these suits tend not to be the those filing suits against mega plans, which suggests new entrants into the ERISA class action 401(k) fee litigation business.
The recent litigation activity highlights the fact that ERISA applies equally to plans of all sizes. Therefore, fiduciaries to smaller plans should consider what actions they may take to mitigate the risk that a court will find they violated their fiduciary duties. Such fiduciaries must make an effort to understand how much their plan, directly and indirectly, pays for investment, recordkeeping and other services.
The manner in which plan service providers are compensated can be complicated, but it is incumbent on plan fiduciaries to gain an understanding of such arrangements, no matter the size of the plan, so they may make decisions as prudent experts and solely in the interest of the participants. They also have an obligation to determine that compensation paid to operate the plan is reasonable. This requires periodic fee studies and, possibly, competitive bidding processes—e.g., requests for proposals (RFPs)—for certain plan services.
To establish their compliance with ERISA, plan fiduciaries should, among other things: 1) identify who should be responsible for making fiduciary decisions under the plan; 2) confirm that fiduciaries have the appropriate expertise to determine whether the decisions they make are prudent and in the best interest of participants; 3) receive appropriate training so they understand their fiduciary obligations under ERISA and the extent of their liability; 4) hire experts such as an investment adviser to aid them in making fiduciary decisions in accordance with a prudent expert standard; 5) meet regularly; 6) clearly document fiduciary decisions and the decisionmaking process; and 7) consider whether they are adequately protected by company indemnification provisions and fiduciary liability insurance.
Under ERISA, if they don’t take such measures, plan fiduciaries are vulnerable to personal liability. Advisers would do well to remind their clients of their fiduciary duties and how they can comply with ERISA.
David Kaleda is a principal in the fiduciary responsibility practice group at Groom Law Group, Chartered, in Washington, D.C. He has an extensive background in the financial services sector. His range of experience includes handling fiduciary matters affecting investment managers, advisers, broker/dealers, insurers, banks and service providers.