In life, it’s usually best if we can learn from the experiences of others. This could not be more true in the retirement plan administration space, where the trend of increasing litigation is not letting up. If you’re a retirement plan sponsor or a committee member, you definitely want to take note of some recent cautionary tales.
What’s at Stake with Retirement Plan Lawsuits?
According to a Bloomberg Law article, the continued explosion of legal activity has cost retirement plan sponsors over $150 million in settlements just over the past three years. That doesn’t even begin to factor in the expense of legal fees, as well as the significant time and distraction involved in the litigation process. Clearly, there is a lot at stake for any retirement plan sponsor or committee member.
Supreme Court Ruling Opens Doors to More Retirement Plan Lawsuits
In 2022, Northwestern University found itself in the spotlight as the U.S. Supreme Court examined a case against its retirement plan committee. They were accused of not offering the lowest-cost plan or the best investment funds. Northwestern tried to raise the bar for legal challenges, insisting that plaintiffs must prove a better option was “actually available” to the plan at the time. While the Court agreed, the Plaintiffs appealed to the Supreme Court. And the Supreme Court didn’t buy the argument. Instead, they sent the case back for reevaluation, overturning the 7th U.S. Circuit Court of Appeals’ dismissal.
Attorneys involved with the case have noted that plan fiduciaries will likely find the 7th Circuit’s latest decision “particularly troubling.” That’s because the decision does not require plaintiffs to allege actual alternatives were available for the retirement plan decisions. They only must claim that other options existed, which is not a high bar for litigation.
This may mean more lawsuits move forward, requiring more resources and time to defend.
How to Avoid Problems: Lessons from Past ERISA Lawsuits
Retirement plan administration can be complex. Recent ERISA lawsuits such as the Northwestern case serve as a reminder of the importance of diligence and best practices. Let’s examine some key lessons from all of the cases.
- Regularly review and update plan fees and investment options. Courts want you to secure good pricing and carefully-chosen investment options for your participants. So, retirement plan administrators must periodically review and update plan fees and investment options to provide the best choices for participants. It is not enough to do it infrequently since market prices and offerings evolve and change over time. Be sure you’re benchmarking fees and evaluating the performance of investment funds on a regular basis.
- Carefully document the entire decision-making process. If you end up in court, you want to have significant and detailed documentation. It’s also crucial to carefully document the rationale and research behind decisions related to plan fees and investment options. This can help demonstrate that the plan sponsor and committee acted prudently and in the best interest of plan participants based on available options.
- Engage in ongoing fiduciary training and education. With so much on the line, retirement plan sponsors should provide ongoing fiduciary training and education. That way, committee members can stay informed about their responsibilities and best practices for retirement plan administration.
- Consider using a qualified independent fiduciary advisor. Since retirement plan committee members have other responsibilities, it can be challenging to remember everything that is required. Since the stakes are high, it can be best to include a trained professional on your team to help share your liability and minimize the potential for expensive oversights. An independent retirement plan advisor can help plan sponsors and committees navigate the complexities of retirement plan administration while ensuring compliance with ERISA regulations. Just be sure to look for a true fiduciary with no conflicts of interest. Also, be wary of general advisors who may not specialize in retirement plans. Local wealth managers who dabble as plan advisors may not have a thorough knowledge of industry requirements and practices, leaving your plan vulnerable to mistakes.
It’s important to realize that if you have a retirement plan, you have potential liability. That’s why it’s critical to treat the entire plan administration process with care. To avoid potential ERISA lawsuits and ensure the best outcome for participants, be sure you’re following accepted best practices and documenting all activities thoroughly.
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