More than a decade into lawsuits alleging that retirement plan sponsors have violated ERISA fiduciary duties by offering weak and costly investment options to participants, new claims continue to be filed. What exactly does ERISA say about investment options? How can plan sponsors protect themselves? Read on for guidance.
Best Performing Funds? Fees?
Two aspects of employer sponsored retirement plans have come under intense scrutiny over the last decade or so: fees and investment returns. It makes sense that no one wants to overpay for services, and everyone hopes savings generate the solid returns needed to retire securely. That’s why it’s critical for plan sponsors to take their benchmarking responsibilities very seriously. But, when assessing investments and fees, plan sponsors should understand that picking “the best funds” is not an explicit ERISA requirement. In fact, as Marcia Wagner, founder and managing partner of the Wagner Law Group points out: “As the [U.S.] 8th Circuit [Court of Appeal] indicated in Meiners v. Wells Fargo, there is no authority requiring a plan fiduciary to pick the best-performing fund….” When it comes to the fiduciary duty of prudence, Wagner explains:
The Department of Labor describes the duty of prudence under ERISA at a principle-based high level that considers “the risk of loss and the opportunity for gain (or other return) associated with the investment compared to the opportunity for gain (or other return) associated with reasonably available alternatives with similar risks….There is no question that the relevant plan fiduciary should engage in benchmarking and the peer review of investments, and at some point in time remove an underperforming fund, but there are no explicit required rules in this regard….” Regulators have not established hard rules on when plan investment offerings need to be replaced. If a plan has an investment policy statement, that document should provide guidelines for retaining or removing underperforming funds. However, she adds that there is no right or wrong solution when making these decisions.
What is essential for retirement plan sponsors when making decisions on the behalf of participants is to seek solid advice, and carefully document the prudent process used in coming to conclusions, as Wagner advises: “…Prudence, because it is not measured in hindsight, does not look to results….The prudence of a plan fiduciary’s activity is based upon the manner in which he or she evaluated and acted upon the information that was available when the decision to retain or remove was made.” Rick Pearl, a partner in the Faegre Drinker law firm further underscores that “ERISA’s general standard of fiduciary prudence is vague by design,” noting: “It was meant to say to fiduciaries, ‘If you are not an expert on an issue and you have to make a decision about an issue that requires some expertise, you act like a prudent person would in that situation, consistent with how trustees act in state law trusts, and you go out and you seek expert advice.’”
For additional insights into what prudent process means when it comes to structuring investment menus, Pearl references Section 404(c) of ERISA and explains:
A significant requirement is that that plan offers a menu of investment options that span the risk-reward spectrum. However, fiduciaries must still ensure the overall prudence of the plan’s investment offerings. A fiduciary does have an obligation to be conversant in the characteristics of an investment option that might affect the goals of the investment…“So, although the plan fiduciaries don’t have to be experts, if there are fees or other considerations that are affecting the fund or the investment option that they have, then it is the obligation of the fiduciary to understand those considerations and ask questions of their expert advisers.”
Good To Know: Case Law
Judgments in ERISA litigation shed light on what plan sponsors can expect in the event they are called upon to defend the investment options and fees they ultimately sign off on. Experts at Plan Sponsor offer these two examples of ERISA case law that are especially worth understanding:
In Tibble v. Edison in 2015, the plaintiffs alleged that the plan administrators’ decision to include retail-class mutual funds, instead of lower-cost institutional funds, was a breach of fiduciary duty. The suit focused on whether plan fiduciaries were required to continually monitor their plan’s investment options and remove imprudent choices. The U.S. Supreme Court ruled unanimously in favor of the plaintiffs….
Hughes v. Northwestern University in 2022 reinforced the Tibble decision. Participants alleged that the university’s 403(b) plan confused participants by offering too many investment options. They also cited the plan’s use of higher-cost funds when lower-cost alternatives were available ……The Supreme Court found in favor of the plaintiffs, citing a lower court’s failure to apply the Tibble precedent properly. The Supreme Court also emphasized that fiduciaries must continuously monitor investment options and remove imprudent choices, even if other prudent options exist within the plan.
Best Practice: Protection
Although “fiduciary” is probably not be the title used on your business card, as a retirement plan sponsor, you are indeed a fiduciary, and as such, you are ultimately personally responsible for decisions like: the selection of service providers; the investment options offered to participants; fees; and, adherence to plan rules. Under the high standards of ERISA law, a single mistake can lead to lawsuits, and even if you have done nothing wrong, the cost of defense and settlement will take a toll. In fact, companies and their fiduciaries continue to be sued, and the average cost of resolving an ERISA allegation is over $1.2 million. How will you defend yourself?
Colonial Surety is here to help, with an affordable insurance package, tailored especially to help plan sponsors mitigate their risks. Armed with our Fiduciary Liability coverage, for a few dollars a day, you’ll have defense costs and penalty limits up to $1,000,000 if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber liability coverage is included at no extra cost, providing additional protection–for the plan and company–against regulatory actions related to data and privacy, as well as expert response services. Our packages are available for 1, 2, and 3-year terms, providing flexibility and locked-in rates:
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