5 Major 401k Lawsuits That Directly Impact Advisors

Recent decisions shape compliance strategies

Key issues and takeaways.Key issues and takeaways.

A rash of recent class action lawsuits has rattled 401k and similar defined contribution plans across the United States. More than ever, there’s a clear need to increase awareness about litigation risk and to understand the key issues that have made their way to the highest courts. These decisions have implications for 401k retirement plan advisors, plan sponsors and other plan fiduciaries alike.

As described in more detail below, recent decisions should help shape compliance strategies for those responsible for managing defined contribution plans.

Notably, the decisions highlighted in this update provide a roadmap for minimizing the risk of fiduciary liability by avoiding excessive fees, monitoring the share classes available to the plan, evaluating revenue sharing arrangements or investment vehicles available to plans, and monitoring company stock.

Recent Supreme Court and Court of Appeals rulings have included:

1. Excessive Fees

Key Issues

In Tussey v. ABB, the court found that 401k plan fiduciaries should have leveraged plan size to negotiate reductions in recordkeeping fees and should have avoided excessive recordkeeping fees used to subsidize the cost of non-plan-related corporate services.

Key Takeaways

  • Understand the fee structure and the amount paid to plan record keepers, regularly benchmark fees with applicable peer groups, and monitor fees on a regular basis.
  • Ensure that the plan’s fees stand independent from any services received by the plan sponsor and that the plan is not used to reduce the sponsor’s cost.

2. Share Classes in Fund Line-Up

Key Issues

In Tibble v. Edison, the court ruled in favor of the plaintiffs that plan fiduciaries breached their duties by investing plan assets in retail share classes, failing to consider less expensive institutional shares.

Key Takeaways

  • Plan fiduciaries should regularly monitor the expenses paid by the plan to ensure it is competitive with similarly situated plans.
  • Plan fiduciaries should regularly monitor and review the share classes for which the plan qualifies.
  • Fully disclose to employees the nature and amounts of fees charged, and develop policies and procedures to respond to inquiries.

3. Revenue Sharing Arrangements

Key Issues

In Renfro v. Unisys Corp., the court found that revenue sharing arrangements must be adequately disclosed under ERISA.

Key Takeaways

  • Plan fiduciaries should (1) understand the fees paid to record keepers and other plan service providers, (2) regularly benchmark fees with applicable peer groups, (3) review fees paid to plan service providers on a regular basis, (4) revisit disclosures to ensure that compensation retained in connection with services provided to plans is accurately disclosed, and (5) review current practices and arrangements in light of ERISA’s conflict of interest and prohibited transaction rules.

4. Investment Vehicle Choice

Key Issues

Courts have decided that ERISA does not preclude the inclusion of mutual funds on plan investment menus. A notable example is Hecker v. Deere.

Key Takeaways

  • Plan fiduciaries should consider the fees and expenses of all available investment options when investing the assets of an ERISA-covered defined contribution plan.

5. Company Stock

 Key Issues

According to the U.S. Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer, ERISA fiduciaries are not entitled to a presumption of prudence when investing in company stock.

Key Takeaways

  • Plan sponsor fiduciaries should take measures to review company stock in light of recent guidance. These steps should include 1) monitoring public information regarding the company that may indicate that there are special circumstances that call into question the prevailing market price for the company stock, and 2) consulting legal counsel if the fiduciaries possess non-public information that may be required to be disclosed under applicable securities laws.

ERISA is complex, and the courts frequently issue game-changing decisions. Plan fiduciaries should aim to avoid fiduciary liability by taking into account the following:

  • Ensure there is a documented, prudent process in place for the consideration, selection, evaluation, or active monitoring of plan investments.
  • Compare costs of investment options, even between retail class shares of mutual funds, but especially between retail shares and institutional shares.
  • Survey the marketplace and document any efforts to control recordkeeping and other plan costs.
  • Ensure each plan service provider’s compensation is properly disclosed.
  • Periodically evaluate the plan, its investments, its plan menu, service providers, and its fiduciaries, in terms of both performance and cost.
  • Encourage plan sponsors to explore appropriate fiduciary liability insurance and fidelity bond coverage to protect plan fiduciaries and members of investment committees.

Jonathan Blaze is with the Institutional Intermediary Business of MainStay Investments. Steve Saxon and George Sepsakos are with the Groom Law Group.

This article is general in nature and is prepared for informational/educational purposes only. This article is not to be construed as legal advice, nor is it intended to be an offer of investment advisory services or products.

New York Life Insurance Company does not offer fiduciary liability insurance.

Neither New York Life nor its affiliates provide tax or legal advice. Plan sponsors should speak to their own tax and legal advisers regarding their specific situation.

MainStay Investments is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302.

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