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What’s New in Fiduciary Breach Cases?

Janus Henderson

Janus Henderson
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CRPS®, Retirement Director

Retirement Director Ben Rizzuto expects two issues – Multiple Employer Plans (MEPs) and the types of investments offered on plan menus – to be part of the next generation of potential fiduciary failures and lawsuits.

A recent article concluded that, since 2009, some 50 plan sponsors have agreed to pay more than $700 million to resolve claims that they breached their fiduciary duties to participants under the Employee Retirement Income Security Act (ERISA).1 Furthermore, in many people’s minds, 2020 was a landmark year2 for ERISA lawsuits as lawyers continued to troll the retirement plan waters for plan sponsors who might not be doing their “fiduciary best.”

But what does one’s fiduciary best look like in a world where virtually everything seems to be a potential fiduciary breach? Excessive record-keeping fees and investment expenses remain common themes, especially since there always seems to be a new way to cut costs. And with the increased diversity and complexity that we see in both participant populations and plan designs, there are bound to be areas that get neglected, leading to more frequent investment policy statement (IPS) violations.

At this point, I think plan sponsors have come to understand that fees are important and have taken it upon themselves to set up processes to keep fees reasonable and to document why decisions have been made. Those processes may make the common issues referenced above less attractive to lawyers looking for a quick settlement. However, it now seems that some lawyers have started looking for new areas where large pots of money exist or are beginning to focus on issues occurring at the margins.

Those two ideas highlight what I believe may be part of the next generation of potential fiduciary failures and lawsuits.

Multiple Employer Plans Under the Microscope

Large asset bases have always been a focus area for lawyers. It started with billion-dollar plans, moved to university 403(b) plans and now we see a growing number of cases in the multiple employer plan (MEP) space. Over the past year, we have seen at least five MEPs sued for alleged fiduciary breaches. These plans serve as large targets based on their having thousands of participants and billions of dollars in assets. While these MEPs are new targets, the issues that are being raised are similar to those we’ve seen in the past. They include allegations that these plans could have offered lower-cost investments based on their size, could have selected better-performing investment options, and could have used the plan’s size to reduce record-keeping fees.

For those that sponsor MEPs, and now Pooled Employer Plans (PEP), we can return to the common refrain of “process, process, process” and “document, document, document.” Plan sponsors need to make sure they have processes in place to review the investment options within their plans to ensure they meet the standards set forth by the plan’s IPS when it comes to fees and performance.

It’s also important to make sure that the fiduciary process includes a prompt to review other, newer investment options that may be available, whether it be a different share class or a different vehicle such as managed accounts or collective investment trusts (CIT).

Finally, plan sponsors should remember to not only document the fact that they went through this process, but also what they found during that process and why certain decisions were made at the end of it.

Also remember that, while these lawsuits may be against the MEP provider who sits at the top of this structure, individual members of a MEP or PEP still have an obligation to review the services provided by the plan, make sure they are sound and ensure they meet the needs of the individual members and plan participants. For example, in a recent blog post on how to position your practice for the new PEPs, I noted that “the law relating to PEPs explicitly states that adopting employers (AE) are fiduciaries with respect to the selection and monitoring of the Pooled Plan Provider and any other designated fiduciaries.”

Investment Menus in the Spotlight

Another burgeoning issue is that of the investment menu. When considering the idea of “improper investments” in the past, allegations typically focused on the performance of investments. For example, a sector fund may have been added to the plan menu but, due to a particularly difficult market cycle, may have returned less than stellar performance. The fund in question may not have been removed from the plan menu, which led to a lawsuit. These types of issues remind us of the classic Tibble v. Edison case and the idea that plan sponsors have a continuing duty to monitor (and possibly remove) investments.3

While the overall performance of investments continues to be paramount, new issues have surfaced. Lawsuits have now started to focus on the types of investments being offered to participants within the core menu, and more specifically if and how those options may or may not allow participants to properly diversify and achieve a sufficient return. These cases have included questions around whether stable value funds should be offered instead of money market funds or how funds have allocated to “riskier” assets classes like private equity.

Along with that, we’ve even seen cases that focus on the correlations between investments, the number of fixed income and equity options, and whether the overall core menu makeup provides participants the ability to diversify adequately or generate sufficient returns. For example, is offering only one fixed income investment option in a core menu sufficient?

What’s important for investment committee members to understand with these lawsuits is that they focus on modern portfolio theory as well as more technical investment statistics such as correlation, standard deviation and alpha. While these terms may not be commonly used or discussed among investment committee members, it is now becoming necessary for members to be more conversant in these topics.

What Does This Mean for Plan Sponsors?

I feel that the areas outlined above should serve as a call to action for plan sponsors and investment committees to be more willing to wade into the minutia of their plans. For instance, they need to be able to understand the innerworkings of the MEP. Who does what and how are they compensated for it? They also need to understand how the investment options offered through the plan could affect participants not just today, but also as they age.

Considering these issues, how might plan sponsors enhance these processes to guard against these new risks? Here are a few ideas to consider:

  • Schedule time with your plan provider(s) and have them list all the services they provide to you and to plan participants along with the costs associated with each service.
  • Review your plan’s IPS. Make sure every member of the investment committee has done this and then make sure everyone understands the investment-related areas within it.
  • Update your IPS to include other investment-related metrics such as correlation, fixed income duration, standard deviation and other statistics that can help describe the expected experience participants will have with the investments they select.
  • Sit down with your plan advisor to review the items above to ensure that investment committee members understand and to discuss how fiduciary gaps might be closed.

Fiduciary breach cases continue to evolve, and while these new issues and areas of concern can be daunting, investment committee can overcome them if they develop processes, document their findings and continue to educate themselves.

For more information on new issues we’re seeing that could impact plan sponsors, please explore our new white paper “The Latest Generation of Fiduciary Failures.”

1“Settlements of 401(k)-Fee Suits Hit $700M.” Ignites, January 2020.
2“$1B and Counting: 401(k) Fee Settlements Surge.” Ignites, January 2021.
3Tibble v. Edison International, No. 7-5359 (C.D. Cal. Aug. 16, 2017)

Originally Posted on April 6, 2021 – What’s New in Fiduciary Breach Cases?

Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.

Correlation measures the degree to which two variables move in relation to each other. A value of 1.0 implies movement in parallel, -1.0 implies movement in opposite directions, and 0.0 implies no relationship.

Duration measures a bond price’s sensitivity to changes in interest rates. The longer a bond’s duration, the higher its sensitivity to changes in interest rates and vice versa.

Alpha compares risk-adjusted performance relative to an index. Positive alpha means outperformance on a risk-adjusted basis.

Standard Deviation measures historical volatility. Higher standard deviation implies greater volatility.

Knowledge Labs® programs are for information purposes only. There is no guarantee that the information supplied is accurate, complete or timely, nor is there any warranty with regards to the results obtained from its use.

Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.Fixed income securities are subject to interest rate, inflation, credit and default risk.  The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa.  The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

A retirement account should be considered a long-term investment. Retirement accounts generally have expenses and account fees, which may impact the value of the account. Non-qualified withdrawals may be subject to taxes and penalties. For more detailed information about taxes, consult a tax attorney or accountant for advice.

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