While today’s economy appears strong following years of a rising stock market and solid gains by bonds, economists’ predictions of a recession could lead to a spike in lawsuits in 401(k) and 403(b) plans, especially when people lose their jobs or investment gains. Employers are already seeing increased litigation – often in the form of class-action lawsuits – involving disputes over excessive retirement-plan fees, questionable investment decisions and other related issues.
Several recent, high-profile disputes in the news include Walgreens, Anthem Inc., CareerBuilder, Goldman Sachs Group Inc., the Massachusetts Institute of Technology and Gucci. Lawsuits such as these that originally targeted megacompanies are now increasing at midsize and smaller companies.
What can businesses do to protect themselves? As always, there are lessons to be learned from companies who have been sued and lost, as well as those who have prevailed.
Here are five rules of the road that are imperative for employers and fiduciaries to understand to help protect themselves from a 401(k) or 403(b) lawsuit:
• Understand all fees paid by the plan or your employees and ensure they are reasonable. In many of the recent lawsuits, the underlying dispute was based on charges of excessive fees taken by retirement plan record-keepers or plan investment providers.
• Follow a prudent review process; document your process, your decisions and why you made them so you can prove you acted prudently. Several of the pending lawsuits hinged on not documenting prudently or not documenting at all.
• Eliminate underperforming funds and carefully select and monitor the investments offered to employees. Make sure to consider a thorough list, including index funds. In many cases, small-business leaders may lack the requisite financial expertise or time to stay on top of these decisions, but it still must be done to protect the plan.
• Adopt a written “investment policy statement” as a roadmap for decision-making, then make sure to follow it. Like a will or an estate plan, generic versions can be found on the internet, but the best documents are developed individually with advice from a retirement plan or legal professional. Several companies have been sued for not following the policy they had in place.
• Regularly prove that plan fees and services are reasonable. A great way to do that is by benchmarking a plan against an appropriate peer group through a “live bid” request-for-proposal process. This will also ensure sure you are getting the best deal. Undertake this process every three to five years, or more often if the plan is growing fast.
While business owners and operators possess many skills and wear many hats, they are often not skilled at the specific ins and outs of retirement plan oversight. In those cases, it is critical to choose an adviser who continually evaluates the plan’s effectiveness and ensures the business is adopting best practices to protect everyone involved.
Additional hot topics that are vital to consider to keep retirement plans litigation-free include: fee equalization where all employees pay the same dollar or percentage amount; revenue-sharing recapture when excessive fees – often from mutual funds – have been identified; and outsourcing of administrative or investment fiduciary duties.
To help get employees on track to retire, consider updating the plan’s design by adding retroactive auto-enrollment and annual auto-escalation of their savings rates. The “auto” approach allows everyone – not just new hires – to be automatically enrolled in the retirement plan at a given rate, for example, 3% or 6%. Then, each year, their savings rate would bump up by, for example, 1%, unless they opt out. This approach is a win-win for employers and employees.
Finally, if there’s a suspicion the plan may not be doing all these things or falling short in some areas, ask a trusted, independent adviser, plan administrator or plan record-keeper for help.
James Worrell is a co-founder and managing director of the Northeast office of Strategic Retirement Partners, an independent retirement plan advisory firm.
