Lessons from retirement industry litigation
If your organization offers a retirement plan to your employees, you assume fiduciary responsibility and that opens you up to a number of risks, including legal action. When you’ve worked in the retirement plan business as long as I have, you can’t escape the occasional breaking news story of a well-meaning company facing litigation involving their company retirement plan. The catalyst for action is usually a disgruntled former employee going to an attorney. The attorney most often looks for mutual funds with higher-than-average expenses based on the holdings information that is publically disclosed (IRS Form 5500). The attorney then multiplies that amount by six years (statute of limitation under ERISA). At that point, the attorney determines if it is financially worthwhile to file for legal action. To further complicate the matter, under the rules for a class action suit in the 401(k) world, just one person satisfies the rules for a class action suit because the class is easy to define (all current and former employees).
Documentation and Neglect
In discovery, the attorney looks for neglect (not replacing funds that are overpriced, underperforming, or have manager turnover) and lack of documentation (written recommendations from the advisor and/or committee minutes), to prove shortcomings in the basis for how decisions are made.
Fortunately, the standard of fiduciary law under ERISA isn’t that your recommendations be 100% correct, but rather that you follow prudent standards (structure, discipline, and documentation) to prove that you have a process in place.
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