2020 turned out to be another landmark year in a growing trend of ERISA class action litigation involving 401(k) plans.
These cases, which generally allege plan sponsors breached their fiduciary duty by charging participants excessive fees, also spilled over into 403(b) plans sponsored by prominent universities, resulting in significant settlements. These lawsuits can be costly to litigate and often last for several years, prompting many of them to settle. Large corporations paid out more than $6.2 billion in ERISA class-action settlements of these cases, and at least 15 corporations had total ERISA payouts of $100 million or more.
Though there is no vaccine against litigation, there are practical steps plan sponsors can take to protect themselves if they are sued:
- Hire and delegate to investment and other providers. ERISA permits delegating certain fiduciary obligations to third parties, such as an investment manager and/or plan administrator. Engaging a qualified provider is, by itself, evidence of a plan sponsor’s care in supporting its plan. Plan sponsors are always responsible for reviewing these providers, but a provider with expertise in investments and other plan activities is more qualified to defend litigation. Plan sponsors should make sure these fiduciaries obtain their own insurance coverage and name the plan sponsor’s organization as an insured.
- Ensure plan documents include class action waivers or arbitration agreements. Plan sponsors are now permitted to require participants to waive their right to join in a class action by including waiver language in the plan documents. The plan provider should be able to include this language in the next amendment cycle for the plan. Additionally, plan sponsors should consider naming a benefits committee, rather than the CEO or other officer, as the plan’s named fiduciary. Corporate executives may possess insider information that a plaintiff may allege prevented the officer from fulfilling his/her fiduciary duties to the plan. Plans should also clearly state the time limits for bringing a claim, which could provide another defense in the event a claim is untimely.
- Maintain internal training and documentation. Courts will continue to examine process more so than outcome. Plan sponsors do not have to select the lowest cost investment options and simply claiming investments are expensive or performed poorly is not enough to pursue a breach of fiduciary duty claim. Plan sponsors who complete regular training about fiduciary obligations, document their policies and well-reasoned decisions about plan investments, and benchmark their plan’s fees periodically can set up a favorable defense in the event of litigation.
- Shop around for coverage. One trickle-down effect of ongoing litigation is an impact on fiduciary insurance premiums. It’s been reported that premiums are up almost 35%, coverage limits are down, and large plan sponsors may need to obtain multiple policies to achieve the coverage levels they once had. These skyrocketing costs could prompt some employers to forego coverage altogether. That would be a big mistake since ERISA claims are usually excluded under traditional professional liability policies and just one of these complaints could easily bankrupt a company.
Now more than ever, it may pay to compare quotes from multiple insurance carriers. Having documentation about completing fiduciary training or other protective measures mentioned here may help sponsors negotiate coverage terms. Plans that offer employer stock or companies undergoing mergers, layoffs, or other ownership transactions, are more susceptible to possible litigation and should get the most insurance they can afford.
While we can’t necessarily slow down the rate of litigation, these steps can help ensure plan sponsors are well prepared, while also doing right by plan participants in the first place. Because after all, offering a 401(k) is an important company benefit, so having happy participants is the best protection there is!
Allison Brecher, general counsel with Vestwell, has over 15 years of legal and regulatory experience, handling high profile and complex litigation involving employee benefits, ERISA, regulatory matters, data privacy and electronic discovery. She can be reached at allison.brecher@vestwell.com.