Recently we discussed how ERISA litigation is expanding to include a broader variety of claims, putting plan sponsors at greater risk. To combat this risk, plan sponsors need to step up and be more strategic about lowering their lawsuit liability.
Here are five steps that you can take to lower your lawsuit liability:
1. Purchase Fiduciary Liability Insurance
Fiduciary liability insurance can either be issued to the plan itself or the employer who sponsors the plan. It protects the insured from claims of breach of fiduciary duty or mistakes in the administration of the plan.
As “third-party” insurance, it is only applicable when someone makes a claim against the plan, not when the administrators discover a problem on their own. Some plans offer optional coverage for bringing a plan into compliance without a claim being filed.
Every policy has different terms, conditions, limitations and definitions. It is important to fully understand what is covered and what is excluded in each plan. Also, you need to know which individuals are covered. Most outside parties, such as third-party administrators, are not covered, even if they are ERISA fiduciaries.
2. Develop A Documented Fiduciary Process
Many claims filed against retirement plans are not clear black-and-white regulatory violations. How decisions were made and the priorities applied are often scrutinized.
It is vital to have an established process that is well documented for making decisions and taking action. Such documentation is essential to support a defense in court. Without documentation of your process and actions, you will not be able to properly defend yourself against allegations of wrongdoing.
3. Be Careful With Company Stock
If your plan offers company stock as an investment option, you face a higher risk of litigation. The only way to remove this risk is to not offer company stock. However, many companies find that the benefits of offering company stock, such as increased participation and savings rates, outweigh the risks involved.
There are some things that plan sponsors can do to protect against litigation. Clearly spelling things out in the plan language can make a huge difference. Does the company intend to invest the stock fund exclusively in company stock? The plan should say so.
Also, plan fiduciaries should regularly monitor the company’s stock. You should develop a standard by which to measure it and include it in the plan documents or investment policy statement. Publicly available information should be regularly reviewed and the stock monitored, and the entire process should be well documented.
4. Understand And Monitor Fees
Fees paid for 401(k) plan services are a popular point of attack for ERISA lawyers. Not investing in the most cost-effective share class, not understanding the plan’s fee breakdown or how it compares to competitors; these can all lead to claims alleging breach of fiduciary duty.
In order to safeguard against such claims, you need to monitor your fees on a regular basis and compare them to proper benchmarks. You also need to understand how fees are paid and any indirect compensation that plan service providers receive in connection with the plan. A thorough understanding and regular scrutiny of plan fees will make great strides in lowering your lawsuit liability.
5. Hire An ERISA§ 3 (21) Fiduciary Advisor
One popular way of lowering fiduciary liability is by delegating it. There are three different kinds of fiduciaries under ERISA, and delegation of any of them can lower the plan sponsor’s risk. Don’t assume that anyone who works with your plan is taking on fiduciary liability, though, because many effectively avoid it.
As mentioned in a previous article, the new trend in ERISA litigation is claims against the investments offered, not just the management of the plan. Many plan sponsors who work with brokers to choose their investments mistakenly believe that the broker takes on some of the liability. Unless they clearly identify themselves as an ERISA§ 3 (21) fiduciary, that is a dangerous assumption.
Hiring an ERISA§ 3 (21) fiduciary for investment advice or to manage plan assets will help you run your plan better, effectively reducing liability.
Next Steps
PlanPilot is an ERISA§ 3 (21) investment fiduciary, and as such, we always put your plan’s best interests before our own. We can help you with plan governance, investment searches, investment monitoring and plan oversight. By working with an experienced professional, you can reduce your lawsuit liability and create a better plan for your employees. Call us at (312) 973-4911 or email info@planpilot.com to see how we can help you protect your company and your employees from damaging ERISA litigation.