Avoiding ERISA Lawsuits Isn’t Hard
Proposed class action lawsuits by retirement plan participants against their own employers are on track for a fivefold increase between last year and this year, according to a Bloomberg Law analysis. Sixty-five class action suits have been filed so far in 2020 and many of these suits are for excessive fees and/or the use of overpriced share classes. Several employers have been sued multiple times (e.g. Quest Diagnostics, Cerner Corp, Omnicom Group). Startlingly, some of the employers are large money management and plan recordkeeping firms (e.g. INVESCO, Goldman Sachs, BlackRock, Mutual of Omaha, Fidelity – multiple times). Talk about a fox guarding the hen house!
Moreover, these lawsuits are being brought against smaller plans (e.g. Greystar Management Services – $188M plan) and to other participant driven plans like 403(b)s (e.g. Mercy Health, University of Miami). After all, ERISA and the duty to pay only reasonable fees applies equally to qualified plans of all sizes and flavors.
Sure, many of these lawsuits can be explained by the fact that the case law is maturing (providing a blue print for action) and that participants are more knowledgeable and attuned to fees now that the expense curtain has been pulled back somewhat. Today, there are more tools and better data to reveal plan fees.
But often, the reason for these lawsuits is simple neglect. Plan assets increase slowly but surely, and plan sponsors fail to use their leverage and take advantage of the lowest cost funds that may be available. We’re reminded here of the boiling frog fable. While we suppose another more sinister reason may exist for the negligence, especially when involving money managers or recordkeepers, we’ll choose to think more honorably.
It doesn’t have to be this way. This really isn’t hard. Plan sponsors should use an experienced, fee-for-service retirement plan advisor. Either way, with respect to fees, a few simple actions can improve fiduciary processes and reduce litigation risk:
- Be sure to have an Investment Policy Statement.
- Choose service providers that charge fixed or per-participant fees vs. an asset-based fee
- Understand what you are currently paying in fees
- Benchmark those fees against other plans of similar size and complexity
- Negotiate fees with your service providers
- Select institutional share classes
- Re-evaluate the fund lineup annually
- Document your evaluation process, meetings, and decisions
- Consider paying for administration expenses, even if it means a lower profit-sharing contribution – you can’t be sued for a lower profit-sharing contribution
How do we know this works? Well, among other reasons, in our 26-year history, over hundreds of plans, no NWPS client has ever been sued by their employees for excessive fees.