Each week seems to bring reports of new legal actions against retirement plans. It’s not just defined contribution sponsors in the crosshairs — suits against nonprofits’ 403(b) plans are also increasing. Your plan sponsor clients certainly don’t want to make the news because one or more of their participants is taking them to court. Although sponsors can’t completely prevent lawsuits, they can work to reduce the grounds for challenges and increase the likelihood that they’ll prevail. Here are some steps to consider.
Get Formal
The days of casually managing a retirement plan are long gone. Sponsors need to adopt and adhere to formal governance structures and processes, says Chris Martin, senior vice president with USI Consulting Group, Inc. in Glastonbury, Connecticut. An effective governance plan protects sponsors and participants, Martin maintains, and he emphasizes four key roles and responsibilities for sponsors.
Select investments prudently. Many sponsors relied solely on providers to manage the investment lineup, but that arrangement can create conflicts of interest when the provider offers proprietary investments. Plans need independent reviews of their investment options; failing to do that can be considered imprudent, he says.
Uphold the duty of loyalty. Plan fiduciaries’ decisions must be clearly in participants’ best interest and avoid conflicts of interest. That means ensuring fees and expenses are reasonable, providing good value for the participants and not enriching any third parties that don’t have participants’ best interest in mind. “When you combine the first one, duty of prudence, with the duty of loyalty, that’s where I think the crux of the majority of these lawsuits get involved,” says Martin.
Follow the plan documents. Failing to follow plan documents is the problem that gets most plans in trouble with regulators, says Martin. When the IRS or Dept. of Labor review plans, one of the first things they consider is whether the plan sponsor understands the terms of its plan and is following its processes and administrative requirements. Mistakes in this area can result in substantial fines, he cautions.
Diversify plan investments. Developing and following an investment policy statement (IPS) to achieve adequate diversity is essential, says Martin. The IPS is “what charts the course for how you bring a diversified menu of investment options to the table for employees to choose from and allow them to minimize their risk in the plan and diversify their investments, (and) to set up an allocation for themselves to help them achieve their retirement goals,” he adds.
Check and Double-check
Checklists may seem quaint, but they are essential to monitoring plans’ required actions and are used regularly by CBIZ Retirement Plan Services, according to Matt Felten, manager, Retirement Plan Investments with the firm in Cumberland, Maryland. Checklists reduce the risk of overlooking a key task in a service area, he believes: “We evaluate the plan and break the plan into chunks roughly along the lines of investments, participant services and plan compliance resources. That includes the testing and compliance functions that are needed for most types of defined contribution plans.”
The checklists serve as logs that CBIZ can use to remind sponsors that it’s time to review an activity or process. “[We can] go back to our plan sponsors to be able to say we’re due to take a second look at this if it’s been a while because we have that on our checklist. Then, consequently, we add new things and mix up the services and talking points that we’re going to present in meetings,” says Felten. “That way we give them a variety of topics — it mixes up our meetings a little bit better, too, so it does have a positive effect in a couple of different areas.”
USI Consulting Group also uses lists, says Martin. With larger clients, they review the lists’ items quarterly; annual reviews generally suffice for smaller plans. Lists are an important element in defending a challenged plan, Martin says: “We believe if they follow our checklist, then that is their best defense possible against any particular lawsuit or action that might be brought against them. It’s been proven over time — the courts and the regulators definitely give deference to plan sponsors that have such a checklist and have documentation. This is the key: It must be documented that they are following those steps.”
Pay the Expenses?
Numerous lawsuits have focused on plan fees. Felten believes that, in some cases, sponsors should pay all or part of their plan’s fees. He agrees that it’s not always a financially feasible solution, but it’s worth considering as an option when possible. “It can be a tough conversation to have, but we have been successful in having a couple of those conversations, and some plan sponsors have adjusted by picking up the bill on an annual basis for the plan,” he says.
