(626) 844-1440

Retirement Plan Administration Lessons from Recent ERISA Lawsuits

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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. 

Key Takeaway

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.

Want more practical tips on avoiding potential problems down the road?

Download our free eBook on how to help reduce your liablity as a retirement plan sponsor.

Looking for help keeping your retirement plan in compliance?

Contact us for a complimentary consultation.

Retirement Plan Sponsors: How to Keep Your 401(k) Committee on Track

If you are a retirement plan sponsor, you may wonder if your 401(k) committee’s efforts are on the right track.  With continued litigation in the space, every company should keep its attention firmly fixed on one thing: prevention of future problems.

However, being a part of a retirement plan committee is not that common.  Most people don’t necessarily know what the role entails.  As a firm that specializes in keeping retirement plan sponsors compliant, we often notice that committees can easily spend their time on things that are out of their control.  Then, the more critical issues receive less attention than they need, leaving the door open to potential liability.  To avoid that, here is a quick guide about where retirement plan committee efforts should be focused to help maximize their effectiveness.

You Can’t Control the Markets, So Don’t Try

The stock market is fascinating, no doubt, so it’s basic human nature that we seek to understand it.  But here’s the thing:  no matter how much discussion we have, the movements of the stock (and bond) markets are entirely out of our control.  So while there’s nothing wrong with a quick market update, spending more than a token amount of time on it is not productive and may detract from critical matters.  But too often, we see committees spend too much time discussing market conditions and where the market is headed.

Here are critical areas for your 401(k) committee to focus on instead:

1) Lowering Investment Costs on the 401(k) Fund Lineup.

While you can’t control the market, there’s something critical that you can control, and that’s costs.  Any time you can provide a similar fund lineup with lower fees, you are doing your job for participants.  And the courts have sent a clear message that if you provide high-cost funds when similar lower-cost options exist, you are assuming significant risk.  So do not ignore this area of concern.    After all, every dollar you save a participant in fees creates more retirement savings for them down the road…every year.

2) Lowering Service Provider Costs.

Along with offering low-fee investment options, you must also provide participants with necessary services at reasonable prices.  Those include the roles of recordkeeper, custodian, trustee and investment advisor.  Your committee is responsible for spending your participants’ hard-earned money wisely, so you must ensure they get value in return.  The best way to display your diligence is to do periodic fee benchmarking.

You can start a Request for Proposal (RFP) and go through the entire process.  However, there is an easier way.  You can instead prepare a Request for Information.  This allows you to periodically compare rates.  Then you can use the findings to negotiate a better rate with your existing provider.

One caution: you do need to weigh value with pricing.  You want to avoid switching providers frequently, which could cause new problems or considerable inconveniences.  Also, don’t just automatically accept the lowest price.   Make sure the provider is experienced and highly recommended.

We recommend fee benchmarking about every 3 to 5 years. For our clients, we do this every 3 years as part of our retirement plan advisor services.

3) Monitoring Performance of Your 401(k) Fund Line Up Versus Peers.

Next, you need to monitor performance.  But it is not the general performance of these funds against market indexes that matters.  That, again, is entirely out of your control.   Instead, you must ensure your plan’s funds perform well relative to their peers. If they don’t, the plan sponsor is responsible for monitoring that and swapping out underperforming funds with a better option.

Funds can and do underperform.  Some common causes are changes in management or change in investment strategy. If that happens, your participants may find themselves invested in a fund that is not keeping pace with its peers.

The courts have emphasized that plan sponsors must monitor this and proactively switch funds when needed.   Our firm has a proprietary system that identifies common signals funds give off before underperforming.  We use that system to help our clients proactively switch to better-performing funds when a fund begins to be problematic.  But however you handle it, this is an area that requires the attention of your retirement plan committee.

4) Providing User-Friendly Participant Communications.

One area where retirement plan committees can provide considerable value is by helping to ensure that employees get high-quality communication about the plan.  Frequently this is passed off the Human Resources, but that can be a mistake.  Why?  HR has many priorities and may not have the time and attention to devote to the retirement plan.

This is important from a liability prevention viewpoint as well, since user-friendly materials can encourage successful program use.  But it should be done proactively; it’s not enough to simply improve them only after complaints arise.

Mandatory notices should be seen as the starting point and should ideally be supplemented with more approachable material.  Much of that language is written by regulators or federal authorities and is not necessarily user-friendly.

As a plan sponsor, it is a good practice to provide more education and clarification than the minimum legally required. That may mean adding a cover letter or a separate piece to the required documents as a start, or ideally adding even more educational content.

5) Potential Improvements to Plan Design.

Another important use of your committee’s time is to look for better ways to serve participants.  Most recordkeepers produce detailed reports that show which aspects of your 401(k) plan get the most and least use.  Ask your committee to review reports periodically to see how participants use the plan.

Are participants taking loans from their 401(k) accounts more often? More education on the potential negative impacts of a loan might be beneficial.  Or it may be timely to have conversations about auto–enroll features as more plans find success with those enhancements.

6) Provide Continual Education to 401(k) Committee Members on the Fiduciary Role.

Many retirement plan committee participants need help understanding their role as fiduciaries.  It is a good practice to regularly revisit the topic briefly, so everyone is clear.

Why is that important?  Because the Department of Labor and the legal community are watching.  In 2022, the Supreme Court reaffirmed that employers have an ongoing duty to protect employees in the plan.

So all decisions need to be made for the participant’s benefit.  When a committee member walks into a meeting, they often need to be reminded that their other roles at the company are not relevant in the meeting.  The only thing that matters is always putting the participants’ best interests first.

7) Don’t Forget to Document 401(k) Committee Actions.

Finally, you don’t want to find out the hard way—in court—that your committee didn’t document everything effectively.  Be sure to emphasize the importance of documenting committee reviews and actions.  Even if a committee review didn’t result in a change, it is critical to document the process of evaluating costs and providers.  (Read our previous article on documentation best practices for retirement plan sponsors.)

Key Takeaway

Most retirement plan committees are passionate about helping participants and the company, but this role doesn’t come naturally.  It’s best to check in periodically and ensure your committee is on track so their time can be used most effectively.

Download our Free eBook for More Tips

For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:

  • Learn about your role as a retirement plan fiduciaryCRC eBook
  • Action steps you can take to identify any areas where you need to do more
  • How to identify and implement best practices

As potential risks rise, make sure your organization is prepared.  Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.

Get Our Free eBook

Why Fee Benchmarking Can Help Plan Sponsors Reduce Potential Liability

Updated Aug. 4, 2022

Fees have been a continuing focal point of retirement plan litigation, for good reason.  Small percentage differences, over time, can eat away at participant nest eggs.

Because of the frequency of excessive fee lawsuits, it is imperative that you employ best practices related to retirement plan fees.  That means taking the time to develop a documented procedure on how you will help ensure that plan fees are kept reasonable.

Here’s a few tips.

Tip 1.  First, know exactly what you are paying.

One challenge to fee review and benchmarking is the complexity of some fee arrangements.  The financial services industry historically is notorious for hidden and confusing fees, so as the plan sponsor you need to be crystal clear on how all plan provider fee arrangements work.  If you don’t understand this to the letter, you could be putting you and your organization at risk.  That’s why it is always recommended to hire service providers who have transparent, easy-to-understand fee schedules. There’s just too much at stake to not require that.

That also means speaking up.  If existing plan service providers give you fee schedules that are not clean and clear, ask for a different structure.  Or just look for other firms who will provide easy to understand fee schedules.

Tip 2.  Make sure all fees are reasonable and necessary

Along with knowing the fees the plan and participants are paying, you also are required to ensure that the services you are purchasing for the plan are necessary and reasonable.  If they are not providing a very specific and needed benefit, you should probably revisit if they are appropriate.  The last thing you want is an attorney finding expenses paid year after year that are optional.

Remember, as plan sponsor you are serving as a fiduciary for your plan participants.  They are counting on you to spend plan money very carefully.  That means every expense should be justified.  There is no room for extras that don’t provide a measurable benefit to the participant.

What about extras that make your job as plan sponsor easier?  Remember, as a fiduciary, you are legally required to put the participant’s interest first.  Always make decisions keeping that factor in mind.

Tip 3.  Benchmark Everything Regularly

Once you are clear on the above, now you need to make sure you’re getting good value for the plan and participants.  The way you can do that most effectively is through benchmarking.

With benchmarking, you periodically compare your fees against the fees of similar plans.  That way, you can see if the fees that your plan and your participants are paying are more than what others pay.  You can then use that information to negotiate better prices with service providers.

This is good news for participants, of course.

Tip 4.  Use the RFI (Request for Information) Process

One of the best ways to benchmark is to periodically engage in something called the “request for information” process.  For most plans, every three to five years is a good interval for this.  More often and you may end up losing effectiveness.

This process keeps the retirement plan market competitive.  In most cases plan sponsors simply opt to remain with their existing provider, but the RFI process allows them to negotiate a better deal.

If you have a full-service retirement plan advisor, they can help you with this process.  At Capital Research + Consulting, we normally do this every three years for our clients.

Things to keep in mind

While fees are critical, don’t lose sight of the need for experience and the right knowledge as well.  Newer entrants to the retirement plan industry might price lower to gain new clients, but that may expose your plan to someone’s learning curve.

As a fiduciary, you want to make the best decisions possible for your participants, so the fees should always be balanced with the need to hire an experienced provider with the right expertise.

Download our Free EBook for More Tips

For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:

  • Learn about your role as a retirement plan fiduciaryCRC eBook
  • Action steps you can take to identify any areas where you need to do more
  • How to identify and implement best practices

As potential risks rise, make sure your organization is prepared.  Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.

Get Our Free eBook

Retirement Plan Advisors: Is a 3(21) or 3(38) Fiduciary Best?

You’re probably aware that you are subject to potential liability if you offer a 401(k) plan.  That’s because you are usually considered to be a fiduciary of that plan if you’re a business owner, board member or manager of the retirement plan.   In plain English, that means you are expected to put your employees’ interests first at all times.  While that sounds commonsense, sometimes the devil is in the details.  Managing the plan correctly to minimize liability can be very technical and time-consuming.

Still, it is critical, and the potential downside is more significant than ever.  A continued trend of lawsuits against plan sponsors has made plan administration a potential minefield.  According to a recent article in PlanSponsor.com, one fiduciary liability insurance underwriter says claims are so commonplace that fiduciary liability insurance could disappear. [i]

It’s especially serious since, along with your organization being potentially liable, it can extend to you.  Fiduciaries of the plan can be held personally liable as well.

How to Control Your Liability

So clearly, liability prevention and minimization are critical.  Working with an experienced retirement plan advisor is one step that can help you lessen your exposure.  But you need to choose carefully, as not all advisors offer you equal levels of protection.

The key is choosing a retirement plan advisor who acts as a plan fiduciary.  That way they can share your liability.  However, not all advisors are held to the same legal standards.

3(21) and 3(38) Retirement Plan Advisors:  What’s the Difference?

These numbers refer to sections of the ERISA regulations and relate to individuals or firms that provide investment expertise to retirement plan sponsors.  Beyond the numbers, you’ll find these two types of advisors are starkly different in the protection they provide to your organization.

What is a 3(21) Fiduciary?

The 3(21) Fiduciary acts as your Co-Fiduciary.  They are an investment advisor who shares liability with you (as a business owner, board member or named fiduciary of the plan).  This advisor will help you develop your initial fund lineup, review investment selections and make recommendations.  But they don’t make the decisions; you do.  So as the final decision maker, you still retain primary responsibility for fees and performance issues related to the selected funds.

What is a 3(38) Fiduciary?

On the other hand, you can directly delegate discretionary authority to a 3(38) Fiduciary.  This type of advisor acts as a hands-on Investment Manager.  That means they can decide what to include in your fund lineup.  They can also implement it and continue to manage the funds over time.

This frees up your time and allows you to transfer much of the liability to their shoulders.  You are still responsible for the due diligence to hire the right advisor, of course, and maintain liability on that end.  But it is far less since they have taken that piece of exposure on directly.

Which Option Is Best for You?

In this risk-filled environment, you need to decide carefully.  Here are a few points to help you determine the best fit for you and your organization.

  1. How much time do you have to commit to retirement plan administration?

If you and your staff are time-constrained, it is wise to consider the more full-service option, the 3(38) advisor.  That way, you won’t risk something getting overlooked by your busy team.

  1. How much expertise do you or someone at your firm have on retirement plan administration?

If you or a team member have experience and knowledge about ERISA regulations and retirement plan administration, then a 3(21) advisor acting as a consultant may work for you.  Otherwise, the 3(38) option will provide you with the expertise and knowledge you need to help prevent problems.

  1. How much liability protection do you want?

If you want a higher level of liability protection, the 3(38) option is the best choice.  By delegating those responsibilities to the outside professional, they assume most of the potential exposure.

Of course, it all comes with a giant caveat:  you need to choose the right retirement plan advisor.  Be careful…many firms hire local wealth managers who only dabble in retirement plans.  In this litigious environment, that can be an expensive mistake.  You need a firm immersed in this specialty so they know the regulations and what constitutes best practices.   Look for a specialist firm with decades of experience helping firms navigate this tricky landscape.

[i] https://www.plansponsor.com/in-depth/rush-litigation-retirement-plans-expected-continue/

Download our Free EBook for More Tips

For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:

  • Learn about your role as a retirement plan fiduciaryCRC eBook
  • Action steps you can take to identify any areas where you need to do more
  • How to identify and implement best practices

As potential risks rise, make sure your organization is prepared.  Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.

Get Our Free eBook

Retirement Plan Sponsors: Is Your 401(k) Plan Future-Proof?

While COVID-19 may not be the emergency it once was, it’s still out there.  And that continues to impact both people and markets.  If your organization sponsors a 401(k), a 403(b), or some other type of retirement plan, it’s especially important to pay attention.   With the continued uncertainty, chances are that participants will be looking more closely at all of their financial accounts, including retirement plans, in the coming months.

Why It’s More Critical Than Ever

Managing your plan has always been important, but it’s even more so now. Why? Unfortunately, litigation against retirement plans continues to increase.

A recent article published by the American Bar Association noted that ERISA lawsuits are at an all-time high.[i] According to Plansponsor.com, over 83,000 ERISA lawsuits have been filed since 2009.ii

Additionally, 403(b) plans, along with small retirement plans of all types, are being increasingly targeted in those lawsuits.

With layoffs and pay cuts on the increase, there’s no reason to expect this trend to slow…and every reason to anticipate it speeding up.

Your Role as a Fiduciary

If you’re a business owner or a human resources manager with control over your organization’s retirement plan, you’re likely considered a legal fiduciary of the plan. That means you’re responsible to put the participant’s interests above your own at all times.

Unfortunately, this liability is not just pure business liability. As a fiduciary, you could be held personally liable as well, putting your personal assets on the line.

Of course, you’re probably taking all the obvious steps to keep the plan on track. This is where the problem lies; it’s not always the obvious things that will trip you up. It’s often the smaller administrative details that the complex regulations require of you.

Continuous Monitoring Required

One benefit of all this legal activity is the clarification of what’s required of retirement plan sponsors. And what has become clear throughout is that your responsibility is continuous, not one-time.

It’s not enough to set the plan up meticulously and select a great lineup of low-cost mutual funds for your participants to choose from.  According to recent case law, that’s just the beginning of your responsibility.

Here are some examples of what courts have found:

  • You must continuously monitor the investments selected for your plan. If any of those mutual funds begin to underperform their peers, you as a plan sponsor are responsible for quickly finding an alternative and replacing the fund.
  • As the plan sponsor, you need to frequently audit the plan to make sure all costs and expenses are reasonable. That means comparing your plan’s costs against those of similar plans and negotiating lower rates when needed.

Emphasis on Fees

Not surprisingly, the biggest area of concern is fees. Which makes sense; every dollar of fees directly impacts each participant’s account.  That’s why it’s critical to pay attention to all costs by asking some key questions:

  • First, is the service you’re paying for necessary in the first place? Do other plans of your size use that service?
  • If the expense is necessary, how much are you paying? Everything you pay should be in line with what other plans of your size are paying, so the participants aren’t being overcharged.
  • Are fees transparent and easy to understand?

Complicating matters are the often confusing fee structures in use by service providers.  Fortunately, there’s a solution to that problem:  ask your service provider for a simpler fee structure. If they are unwilling to work with you, consider that a valuable red flag.  Quality firms are very well aware of the litigious environment and should understand your request and work with you to find a better solution.

Who’s Watching?

Of particular concern is that a few law firms have been specializing in retirement plan litigation. Some have been advertising online, seeking employees who are unhappy with their retirement plans.

As you probably know, a lawsuit doesn’t even need to have merit to be extremely expensive to defend.

Reduce Risk With Best Practices

So how do you stay safe?  Our best advice is to make sure you are compliant with all regulations and implement best practices with your retirement plan administration.

Also, it’s a good idea to do everything with the assumption you might get called into court to prove it.  To put it another way, now is not the time to be casual with recordkeeping.  Instead, your motto should be document, document, document.

Please see my recent article for further tips on effective documentation practices.

Reduce Your Liability by Sharing with an Expert

Another way to manage risk is to share your liability with a specialist firm that has expertise in retirement plan administration.

There are two different ways to do this. First, you can hire a 3(21) advisor, who will share that fiduciary responsibility for plan management with you. Even better, you can hire a 3(38) advisor. (These numbers simply refer to that numbered section of the Employee Retirement Income Security Act of 1974 (ERISA).)

The 3(38) advisor can make investment decisions for your plan and assume responsibility for implementing them. In this way, they take on more liability for issues, thereby reducing yours.

Choose Very Carefully

One critical thing to remember is that everything you do needs to be well-reasoned and documented. That includes hiring the right financial advisor for your retirement plan. If there ever were any legal claims, you would want to be able to show the steps you took to screen and select the best retirement plan advisor.

You can read my previous article providing specific screening steps so you can hire properly.

One More Complication

Finally, one more challenge was created with the arrival of the pandemic, and that’s some new provisions in the CARES Act. The Coronavirus Aid, Relief and Economic Security Act was created to help people and businesses impacted by COVID 19.[ii]

There have been a few changes impacting retirement plans:

  • If your business has been heavily impacted by the virus, you may have the ability to reduce or temporarily suspend your employer contributions.
  • Several changes may be available for your participants, including increased ability to cash out a portion of their account or take a loan to help them with income losses.

Any change to the plan should be done carefully and with the best interest of the participants in mind.

Also, this is evolving as the IRS works to interpret the newly passed CARES Act.


Unfortunately, it’s not an easy time to be a retirement plan sponsor, but your responsibility to your participants doesn’t disappear in a pandemic. Given the high stakes, it’s critical to make sure you are doing things according to regulations and best practices. In the case of avoiding expensive legal problems, an ounce of prevention really is worth a pound of cure.

[i] Jara, José M. ERISA: THOU SHALL NOT PAY EXCESSIVE FEES! www.americanbar.org/groups/real_property_trust_estate/publications/ereport/rpte-ereport-winter-2019/erisa–thou-shall-not-pay-excessive-fees-/.

[ii] Manganaro, John. Assessing Courts’ ERISA Decisions in 2018. 31 Dec. 2018, www.plansponsor.com/assessing-courts-erisa-decisions-2018/.

[ii] “Guide to the CARES Act.” Guide to the CARES Act – U.S. Committee on Small Business & Entrepreneurship, U.S. Senate Committee on Small Business & Entrepreneurship, www.sbc.senate.gov/public/index.cfm/guide-to-the-cares-act.

Download our Free EBook for More Tips

For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:

  • Learn about your role as a retirement plan fiduciaryCRC eBook
  • Action steps you can take to identify any areas where you need to do more
  • How to identify and implement best practices

As potential risks rise, make sure your organization is prepared.  Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.

Get Our Free eBook

How Plan Sponsors Can Help Reduce Participant Investing Mistakes

Most of the people enrolled in your organization’s 401(k) retirement savings plan are not experienced investors.  In fact, for most, the mere act of choosing which funds to include in their account can be a real challenge, if not downright intimidating.  Along with that, the 24/7 presence of financial news on the internet can create anxiety for the retirement investor.

As a result, many of your plan’s participants are vulnerable to making some serious mistakes along their journey of investing for retirement.

The reality is markets, like most things in life, are cyclical in nature. There are periods when markets advance (bull markets), followed by periods of time when markets mostly drop or stay flat (bear markets).  This is natural of course, but sometimes happen with little to no warning– just think of the 2008 or 2020 market shocks.

As a retirement plan sponsor, you have responsibility to provide education to your participants.  But education can only do so much.  Even if people are taught to expect the ups and downs, natural human emotions of fear and greed unfortunately drive our investing decisions.  With enough repetition, education can sometimes overcome those emotions; but that doesn’t happen very often.

Want proof that retirement savers don’t always make the most sound investment decisions?  According to a recent Dalbar Inc. study, “In 2018 the average investor underperformed the S&P 500 in both good times and bad, lagging behind the S&P by more than 100 basis points in two different months”.  This study is not alone, either; many others have reported similar results.

But why do individual investors make such poor investment decisions in the first place?

Behavioral Finance: Identifying Common Culprits

You can chalk it up to a collection of emotional and cognitive biases. Emotional biases allow an investor’s judgment to be clouded by their emotions, such as the natural instinct to try to prevent a monetary loss or the tendency to over-value a personal possession.

Cognitive biases, on the other hand, cause investors to make poor decisions because of objective errors in their thinking or reasoning process. In other words, their brain plays tricks on them causing them to over-estimate their reasoning abilities.

It’s these biases that can cause individual investors to overreact to any number of “triggers,” such as market performance or economic news.  Investors then end up being overly confident or overly cautious, trading too often too soon, or too little too late.

Here are a few of the common biases impacting retirement plan investors that you should be aware of:

Endowment Bias. We tend to place a greater value on an investment we currently own. This means once something comes into our possession, it’s hard to think about its value in a rational way. Our selling price then rises above what most buyers are willing to pay.

Recency Bias. We have a tendency to believe that what happened in the most recent past will continue to happen in the future. Thus, investors choose investments for their portfolio based on their most recent performance, a behavior also known as “chasing returns.”

The Disposition Effect. The disposition effect is the reluctance of an investor to sell losing investments, while at the same time prematurely selling off those investments that have made gains. Investors dislike losses and are willing to take risks in order to avoid experiencing them. Conversely, investors want to lock in gains, so they sell assets that have already earned them money– even if those same assets could potentially earn them even more in the future.

The Sunk-Cost Fallacy. The disposition effect is related to the sunk-cost fallacy. It occurs when investors refuse to cut their losses once an investment is made. Instead, they may actually invest additional time and money into the asset in the hope that they will eventually recoup their loss.

Herding Bias. In general, we tend to feel more comfortable following the crowd, assuming that the consensus opinion is the most appropriate one even when there is clear evidence indicating otherwise.

The Overconfidence Effect. We tend to overestimate our own abilities, thinking we know more than we actually do. But, the reality is most professionals have access to sophisticated tools and algorithms as well as historical data, and even they can’t always beat the market.

How Can You Help Plan Participants Avoid Costly Investment Mistakes?

Aside from regularly monitoring and reviewing the funds in your organization’s 401(k) plan so you can remove any under-performing investment options, the need for professional investment management and coaching is apparent given the results individual investors produce.

Education helps, of course and needs to be part of your offering.  But in addition, this is where offering low-fee managed options, like model portfolios, can help you provide a better option.  Target date funds are popular, but most may have high fees, so as always, take care in evaluating your options.

In summary, investor bias can be a real threat to the balances in your participant’s 401(k) accounts. But, by proactively offering safer investment options and a little guidance, you can help steer them and their money in the right direction.

Download our Free EBook for More Tips

For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:

  • Learn about your role as a retirement plan fiduciaryCRC eBook
  • Action steps you can take to identify any areas where you need to do more
  • How to identify and implement best practices

As potential risks rise, make sure your organization is prepared.  Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.

Get Our Free eBook

Six 401(k) Committee Best Practices to Reduce Your Liability

Updated 12/17/2021

With the continued rise in retirement plan litigation, 401(k) committee members are likely wondering what can be done to reduce potential liability.  While new cases can bring up new themes, one has persisted:  that’s the need to adopt best practices in your participant’s best interests.

But for busy professionals who find themselves on a 401(k) committee, what exactly does that mean?

As retirement plan specialists for the past three decades, we work with many 401(k) committees.  Here are our top tips to get your committee on track, so you can minimize liability and maximize service to your valued participants.

1) Formalize your 401(k) committee policies and practices.

As a committee member, it’s crucial to separate your role at the company from your role as part of the 401(k) committee.  When working on the committee, there’s only one thing that is important:  the best interests of the participants.

Given that they must trust the plan to safeguard their retirement savings, the entire effort must be viewed through that lens.

That’s why you need formal policies and procedures for all committee functions.

If you have a retirement plan advisor, they should typically provide this for you. If not, take the time to establish these essential guidelines in the form of a charter or by-laws.  The following should be covered, at a minimum:

  • Outline the responsibilities of all members
  • Document each member’s fiduciary duty (which should be acknowledged in writing)
  • Outline how often the committee will meet
  • Document the procedure for handling participant questions
  • Create a formal process for decision-making

The last item is essential.  That’s because the ERISA Act, the law that governs qualified retirement plans, requires plan sponsors to use a prudent decision-making process when deciding for the plan.[i]

2) Educate your 401(k) committee members.

Committee members should be hand-selected; you cannot afford those who may not take the process seriously.  In fact, these individuals need to take the process seriously as they potentially face personal liability as plan fiduciaries.[ii]

That’s where education is key.  With busy people used to looking out for the company, you need to train all participants in several aspects of the regulations present in ERISA and 401(k) plan management:

  • The fiduciary role and mindset
  • Plan policies and procedures
  • Investment review guidelines
  • Plan documents

3) Periodically review plan expenses.

Current litigation trends continue to show that plan expenses are still an important focal point.  Understandably so, since plan expenses directly impact the ability of your participants to create retirement wealth. Your participants count on the plan sponsor to keep these fees reasonable, to keep their money working for them efficiently.

So a primary purpose of the 401(k) committee is to control all costs related to the plan.

Past litigation has focused on the following aspects of fees:

  • Utilizing the most inexpensive share class for each investment option
  • Keeping custodian and record keeper costs reasonable and competitive
  • Managing fees for retirement plan advisors, trustees, auditors, and other service providers

However, just choosing the lowest cost option is not necessarily prudent, either. You’re also responsible for finding value and making sure the option selected is the best combination of value and price.

The best practice is to do fee benchmarking, which is a way to compare your plan’s fees to peer plans.  Doing it right can also allow you to lower costs without having to change vendors.  You can learn more about this process in our fee benchmarking article.

4) Establish a system to monitor the plan’s investments.

Another litigation hot point has been monitoring the plan’s investment options.  Many firms do a lot of work up front to identify an excellent, low-cost fund lineup, then think most of that work is done.

Unfortunately, courts see it otherwise.  The US Supreme Court has ruled that plan sponsors have a continuing duty to monitor the plan and its funds.[iii]

What does that mean to you?  It is your organization’s responsibility to monitor funds offered.  Then, if and when a fund or investment shows signs of faltering, you are responsible for replacing it with a better option.

As you can imagine, this task requires some specialized expertise.  Most firms do best partnering with a retirement plan advisor who has a system to monitor funds.  But be careful because not all retirement plan advisors have an automated system or extensive experience in this area. Given the legal precedent, you don’t want to make a mistake here.

We covered this step in more detail in a previous article, Why it’s Critical for Plan Sponsors to Continually Monitor Plan Investments.

5) Document everything that is done for the plan.

So far, we’ve reviewed four critical practices 401(k) committees should consider adopting.  The fifth is simply documenting everything you do.  Why?  If you’re ever threatened with a lawsuit, you don’t want to have to try to prove you covered something but have no physical record of it.

Instead, you’ll want plenty of proof to show the efforts you’ve taken on behalf of the participants and the plan.  Good documentation does that for you.

Here are a few tips for documenting actions effectively:

  • Every meeting should be planned with a formal written agenda.
  • Meeting minutes should be recorded, including detail on options evaluated when making decisions, along with documenting the entire voting process.
  • Any correspondence with participants should be documented and retained, including any follow-up that occurred.

For more on this, you can review our previous article on documentation best practices.

Please don’t underestimate this step.  Quality documentation of the actions you’ve taken to help protect the plan and participants will be invaluable if you ever wind up in court.

6) Work with an advisor who shares your liability.

As you can see, there’s a lot to do to manage potential liability, much of it requiring specialized knowledge.  That’s why having the right retirement plan advisor isn’t just important; it’s critical.

Many times firms hire a local firm. This can be fine if they are retirement plan specialists.  But given the ongoing litigation, you don’t want to work with someone who just dabbles in a few plans as a sideline to their core business.  You will likely be best served by working with a specialist firm that actively stays on top of litigation trends.  They can help your committee remain compliant and avoid missteps.

Even better, certain retirement plan advisors can actually help you reduce your liability.  Not all can, though, so you need to choose carefully.  Brokers can provide advice but may not serve as a co-fiduciary for your plan.  However, two types of retirement plan advisors can reduce your liability by acting as a co-fiduciary for the plan:

  • The ERISA 3(21) Investment Advisor. This type of advisor may advise you, which assumes some responsibility, but you still retain most of the liability.
  • The ERISA 3(38) Investment Manager. This type of advisor can provide advice, but along with that, has the discretion to make and implement investment decisions for the plan. [iv] This allows you to shift much of the liability to that advisor.

While fewer firms are qualified to act as a 3(38) manager, this type of advisor can significantly lessen your plan’s liability by shouldering more responsibility.  Please note you’re still on the hook for carefully hiring this type of firm.

Final Words of Advice

Unfortunately, the continuing litigation trend is a cause for concern, so don’t take this responsibility lightly.  Fortunately, by following best practices, you can actively reduce potential liability.  Working with a 3(38) advisor can reduce it even further.

Whatever you do, always keep in mind, your participants are counting on you to help protect their retirement savings.  Go into every committee meeting with that in mind, and it can go a long way in helping you avoid liability and get better results for all parties involved.


[i] https://www.govinfo.gov/content/pkg/COMPS-896/pdf/COMPS-896.pdf

[ii] https://retirementlc.com/are-plan-committee-members-fiduciaries/

[iii] https://www.venable.com/insights/publications/2015/06/us-supreme-court-holds-that-retirement-plan-fiduci

[iv] https://www.employeefiduciary.com/blog/hiring-an-erisa-338-investment-manager-limites-401k-investment-liability

Download our Free eBook for More Tips

For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:

  • Learn about your role as a retirement plan fiduciaryCRC eBook
  • Action steps you can take to identify any areas where you need to do more
  • How to identify and implement best practices

As potential risks rise, make sure your organization is prepared.  Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.

Get Our Free eBook

How To Find The Best Financial Advisor for Your Retirement Plan


As a retirement plan sponsor, you are shouldering a lot of risk, whether you’re aware of it or not.  Today, doing it right is even more critical, since there are attorneys watching. Litigation against retirement plan sponsors has been on the rise over the past decade. Initially limited to large companies, lawsuits have been filed against large and small plans alike, with claims that plan sponsors are not managing their plans properly.

Unfortunately, it’s no longer just a few isolated incidents.  According to Plansponsor.com, more than 83,000 ERISA lawsuits have been filed against retirement plans since 2009.  And some specialty law firms are now advertising for disgruntled employees who are not happy with their retirement plan.

Bottom line: you can’t afford to make mistakes with your employees’ retirement plan. Not only does your business have potential liability, but that liability can extend to you personally, too. (You can read more about your potential liability as a retirement plan sponsor in my previous article.)

So unless you have specialized experience in managing your firm’s 401(k) plan (or your nonprofit’s 403(b) plan), it’s prudent to consider outside help. In fact, doing so could be one of the most important decisions you make.

Role of the Retirement Plan Advisor

It might be easy to think that the role of a retirement plan advisor is to focus on investments. While they will help with that, the advisor’s real role is to make sure everything related to the plan is done properly and to ensure the interests of your participants are protected. In that process, the advisor’s presence also protects you, the retirement plan sponsor.

 Minimizing Your Risk

Your goal should be to reduce your risks. These risks include the risk of lawsuits, risk of ERISA and Department of Labor audits, risk of penalties, and risk of complaints. That’s where having a professional retirement plan advisor can keep you out of trouble. You want someone who has experience managing multiple plans for decades. They should know the ins and outs of management, so they can make sure your plan is handled correctly. If you do this, it can help cut down your risk of problems.  But the caveat is: you have to hire the right advisor.

Hire a Fiduciary

As a plan sponsor, you are already considered a fiduciary for your plan. That simply means you are on the hook to always do what’s best for your participants. If you don’t, you expose yourself and your company to potential liability.

Some advisors, such as brokers, may provide you with advice, but not serve as a fiduciary themselves. While that’s better than nothing, you still shoulder all the responsibility.

However, there’s a much better option: hire a fiduciary advisor.

Sharing the Responsibility

Fortunately, there are financial advisors out there who are qualified to share that fiduciary responsibility with you. Within the scope of fiduciary advisors, you have two options: a 3(21) advisor or a 3(38) advisor. Those numbers simply refer to sections of the Employee Retirement Income Security Act of 1974 (ERISA).

What’s the difference? A 3(21) advisor acts as a co-fiduciary with you. That means they primarily act as your advisor, but you maintain the discretion to make the final decision. This arrangement allows them to share some of the fiduciary responsibility, but you remain on the hook for most of it.

On the other hand, a 3(38) advisor has the discretion to make and implement investment decisions for the plan. In this case, you (as the plan sponsor) have less liability because the 3(38) advisor takes on more of it. One important thing to note, however: that doesn’t absolve you of all fiduciary responsibility. You’re still on the hook to hire that advisor carefully, then monitor their activities.

According to data from Ann Schleck & Co., in 2016 there were far more 3(21) advisors available than 3(38) advisors, so be sure you know the difference before you hire someone.

Get it in Writing

Hiring a firm for this role is a critical decision. They should be willing to document exactly the role they will play as a fiduciary to your plan. So don’t be shy; get it in writing from the firm you’re considering hiring.

Other Considerations

Because this is such an important hire, be sure to ask the right questions and document your entire hiring process.

Don’t just assume every firm is well-qualified.  Often, a local advisor who does a “bit” of retirement plan work may approach you. While it makes sense to hire someone locally if possible, there’s a real risk that the advisor who only works with a few plans is not fully up to date on all the various issues facing plan sponsors. One misstep can mean potential liability.

Instead, it’s best to avoid being part of anyone’s learning curve. Look for an advisory firm that has worked with many retirement plans. And their experience should span decades, not just a few years.  Because investments are involved, be sure to hire a firm that has helped clients successfully navigate all kinds of market and economic conditions.

As importantly, remember: you retain fiduciary responsibility no matter who you hire. Make sure the firms you consider communicate in a style you can understand and will devote enough time to your plan. That way you can stay in control and understand the process.

Many of the large firms are of course very competent, but may not devote enough time to smaller plans. The risk here is that something occurs that they aren’t aware of, which can happen when there’s little communication.  We’ve seen that frequently in our decades of work with small and large plans so be aware of that.

We’ll have more tips in future blogs. Whatever you do, take your time and hire right, since this is a critical decision.



Download our Free EBook for More Tips

For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:

  • Learn about your role as a retirement plan fiduciaryCRC eBook
  • Action steps you can take to identify any areas where you need to do more
  • How to identify and implement best practices

As potential risks rise, make sure your organization is prepared.  Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.

Get Our Free eBook

Why it’s Critical for Plan Sponsors to Continually Monitor Plan Investments


As a retirement plan sponsor, you’ve got many responsibilities.  But once you get the plan setup and do extensive research to offer a great lineup of professionally managed, low-cost mutual funds, you’re done, right?

Not so fast.

As a retirement plan sponsor, never forget that you are considered a fiduciary for the plan.  That means you must always put the interests of the participants first.  It’s their money and you are entrusted to look out for it.

As modern day plan sponsors are finding, that responsibility cannot be understated.

Let’s say you pick a fund family or group of funds that offer value for reasonable fees.  That’s great, you’re doing your job.  You document everything fully.  Are you done?  No.  These funds each have a lot of moving parts. Things can change:

  • The fund manager(s) may change.
  • The fund may change its investment approach.
  • The fund may stray from its investment approach
  • The management may not execute on their plan effectively

Then there are other factors that might not impact the fund, but still impact your participants.  For example, maybe fund management fees start dropping in the industry, making quality, lower cost options available.


Continuing Fiduciary Duty Confirmed by the Supreme Court

That’s why it’s important to understand that your responsibility does not just lie with selecting the initial fund lineup.  You’re responsible for continually monitoring the funds to make sure they remain a prudent choice for your participants.

This was underscored in 2015 when the United State Supreme Court held that employers have a continuing fiduciary duty to monitor the investment alternatives offered under the retirement plans they sponsor. In this case involving Edison International 401(k), the Supreme Court justices were unanimous in their finding that monitoring investments in a retirement plan is a “continuing duty”.

The ruling also provide some specific guidelines, too:

  • Plan sponsors or an investment fiduciary have a continuing duty to review plan options and remove any investment options that become imprudent.
  • That continuing duty requires that the creation of a process to regularly review the plan’s investment options and take action when needed.

The message is clear:  if you haven’t been regularly reviewing mutual funds in the plan, you need to start now.  And it needs to be done regularly with an organized, documented process.


What’s Your Process?

Since most plan sponsors are not investment experts, this is where your retirement plan advisor can (and already should be) helping.

At Capital Research + Consulting, over the years, we’ve identified a handful of signals mutual funds give off prior to faltering. Our research has found that these signals usually result in later underperformance. We’ve invested in automating that research.  Our Early Warning System continuously monitors our client’s plan investments.  We receive an alert when and if it signals. At that time, we’ll research and recommend a suitable replacement.

That’s just an example of our process.  Be sure that your retirement plan advisor creates a process based on best practices as that is likely what the courts will be looking for.

This is where it’s also important that you employ a retirement plan advisor who is very experienced with retirement plan administration.  If you hire a generalist advisor who just manages a few plans, you risk potential problems, since they may not be that aware of the issues they may face.

So learn a lesson from the Tibble v Edison case:  the courts take this responsibility seriously.  As a fiduciary, you not only have corporate responsibility, you potentially have personal liability too.  (You can learn more about that in our previous article on fiduciary responsibility).

Whatever you do, understand that attorneys and courts will be watching.  So don’t put this off….double check you’re doing this now, for the good of all parties involved.



Download our Free EBook for More Tips

For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:

  • Learn about your role as a retirement plan fiduciaryCRC eBook
  • Action steps you can take to identify any areas where you need to do more
  • How to identify and implement best practices

As potential risks rise, make sure your organization is prepared.  Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.

Get Our Free eBook

How Proper Documentation Can Help Retirement Plan Sponsors Prevent Liability


If your organization sponsors a retirement plan, you don’t want to underestimate your potential liability.  Why?  Because along with your organization being liable, you might be personally liable, too.

Several years ago, litigation against 401(k) and other retirement plans was focused on the really large plans, but more recent actions have been filed against all sizes of plans. Worse yet, attorneys are starting to target disgruntled employees to seek out potential actions.

As long as this trend continues, it’s vital to realize that no organization is immune to potential legal troubles.

Fortunately, there are some steps you can take to minimize your potential liability. One important one is keeping good records.


Put it in Writing

If you’ve ever had the unfortunate experience of being involved in any type of lawsuit or legal claim, you probably quickly realized the importance of getting things in writing.

As a retirement plan sponsor, you’ve got significant fiduciary responsibilities. That means you are responsible, both personally and through your organization, to always put the participant’s interests first; you need to make sure the participants’ money is always handled correctly. And you need to administer the plan to the letter of regulations and always use best practices.  That makes sense, since your valued team entrusts the plan with the money they will rely on after they retire.   The plan needs to be managed cost-effectively and transparently.

So there’s no room for error. You’ve got to do everything required of you as a plan sponsor. Then, once you do it, you want to properly document it all.


Keep it Thorough and Formal

Furthermore, you must be very careful to document things in a way that is thorough and formal. In a legal proceeding, everything in writing might be put under a microscope. Worse, if you didn’t document certain things (like meeting minutes, or how you handled participant concerns), that could create risk for you and your organization.

With retirement plans, literally everything you do should be documented. Since we’re dealing with your employees’ money, again, documentation should never be informal. Everything should include sufficient detail about what is being done for the plan, and provide reasoning behind why certain decisions were made. While it might seem laborious, this process is your potential protection if you end up involved in any type of legal claim.

One caveat, though: the documentation needs to remain consistent. If you detail actions that need to be followed up on, then those follow-up actions must also be documented in a similar fashion. If not, your detailed records can potentially backfire on you.

If you’ve got a retirement plan advisor who’s knowledgeable about litigation trigger points, they can help you with this process. Also, your consultants should be providing you with regular reports, which should be added to your documentation.

With the responsibilities placed on you as plan sponsor, this message is vitally important: You must document everything you do for the plan.

Don’t forget to take detailed minutes in your retirement plan meetings. Your retirement plan advisor may provide that service for you, but you should always review those and retain copies in the plan records.

Other areas that should be thoroughly documented:

  • Lists of attendees and facilitators at participant education and enrollment meetings
  • Copies of all communications sent and received
  • Copies of all investment education materials

When handling your participants’ investments, it’s not enough to make sure you’re doing it right; you must also keep detailed records of how you’re doing it. The former protects their money; the latter protects you.


(This was an excerpt from our free eBook, How to Reduce Your Potential Liability as a Plan Sponsor.)

Download our Free EBook for More Tips

For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:

  • Learn about your role as a retirement plan fiduciaryCRC eBook
  • Action steps you can take to identify any areas where you need to do more
  • How to identify and implement best practices

As potential risks rise, make sure your organization is prepared.  Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.

Get Our Free eBook

Get Our Free eBook