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Blog > Mitigating the Risk of Retirement Plan Litigation


Mitigating the Risk of Retirement Plan Litigation


An article released by CNBC defined "lousy" retirement plans as those with high fees and poor investment options. Such plans face a higher risk of class-action litigation. While the increased focus placed upon retirement plans and the resulting lawsuits should be concerning to plan sponsors, proactive steps can be taken to mitigate the risk of litigation.


Understand Your Fiduciary Duties

A host of lawsuits may have been averted had plan sponsors fully understood their fiduciary duties. Basic questions regarding fiduciary status are often left unexamined: Who are fiduciaries to the retirement plan? What ERISA training do plan fiduciaries receive? What roles do the selected plan service providers or consultants play in the fiduciary structure? While the discussion of fiduciary duties might be addressed when one first assumes a fiduciary role, true comprehension of these duties often fades with time. It is critical for plan fiduciaries to maintain a working understanding of their duties in order to insulate against the threat of litigation.


Follow a Prudent Oversight Process

The Employee Retirement Income Security Act of 1974 (ERISA) lays out expectations for the proper administration and oversight of employee benefit plans. In order to exhibit adherence to ERISA’s requirements, plan fiduciaries must be able to demonstrate a prudent oversight process. First, the process must be established, outlined in the form of an investment policy statement. Then the process must be implemented in the form of regular (typically quarterly) plan reviews. Finally, an annual evaluation of the plan’s activities should be conducted to ensure the process, as outlined, remains prudent and was effectively followed and documented.


Monitor Fees Consistently

Plan fees – resulting from asset management and plan administration – are a popular focus of recent litigation. ERISA does not mandate that plan fiduciaries select the cheapest funds or lowest-cost service providers, but the law does expect that a regular evaluation is completed to ensure fees paid are reasonable relative to the services provided. Plan fiduciaries must demonstrate that fund and provider selections are made in accordance with that of a prudent expert. For investment managers, this means analyzing more than performance. If plan fiduciaries, however, are not monitoring these fees on a consistent basis, they are not protecting their participants from excessive fees as well as they could be.


The threat of litigation due to breach of fiduciary duties is real. Instead of reading the headlines and fearing the worst, plan fiduciaries should insulate themselves and their plans against such threats. By understanding fiduciary duties, following a prudent process, and monitoring plan fees consistently, the threat of litigation may be proactively addressed.

Francis Investment Counsel does not offer tax or legal advice. Please consult your tax or legal advisor for such guidance.