According to Bloomberg's Bureau of National Affairs, over 100 new 401(k) complaints were filed in 2016-2017, the highest two-year total since 2008-2009 (Bloomberg BNA 2019 ERISA Litigation Tracker). The pace of these lawsuits has continued into 2019. The focus of these class action lawsuits centers on the assertion that the plan fiduciaries (i) made inappropriate investment choices and (ii) administrative and investment fees were too high. An ERISA fiduciary must act for the exclusive benefit of participants, provide benefits and defray reasonable administrative expenses and invest the plan's assets in a prudent, diversified manner in accordance with the plan documents.
A person becomes an ERISA fiduciary if they are appointed to that position or are named in the plan document ("named fiduciary") or exercise discretionary authority or control over the plan's administration and/or investments. Most plan documents provide—and conventional wisdom supports—that the company (and therefore the board) is the plan’s named fiduciary. However, a company that establishes and maintains the plan, the plan sponsor or "settlor" of the plan, is not necessarily a fiduciary. ERISA does not require that the company plan sponsor be a named fiduciary and allows this function to be outsourced by the company.
While it is not free from doubt that the board can completely outsource the named fiduciary function by naming someone else as the named fiduciary, and plaintiffs are likely to include the company/board as a defendant in a lawsuit, the board should at least take any necessary steps to minimize or avoid being named as or acting as a fiduciary.
If the board of directors adopts a 401(k) plan, the plan document does not name the company plan sponsor as a named fiduciary but instead names, for example, a benefits committee (comprising subject matter expert employees), and the board exercises no discretion regarding the membership of the committee, the administration of the plan or its investments, then the board has best positioned itself to argue that it is not a plan fiduciary subject to a claim of a breach of fiduciary duties. Not only that, but it has prudently set into motion the best governance practices for the plan.
Optimal Structure for Avoiding ERISA 401(k) Class Action Litigation
The board of directors/committee should limit its role to adopting and amending the plan as plan settlor and not as a fiduciary. Also, the company may consider having the CEO adopt the plan rather than the board to further distance the board from fiduciary status. Finally, the charter of the compensation committee should give the committee only general oversight over all benefits. The committee should not appoint members of the benefits committee or specifically review its performance.
Practice Note: It is critical then that the plan document and the summary plan description (SPD) name a fiduciary other than the company plan sponsor as the party with discretionary authority over plan administration and investments.
The plan document/SPD should name a benefits committee as the named fiduciary responsible for plan administration and investments and identify committee membership based on employees and their roles. The benefits committee should have a charter with self-perpetuating membership and a specific list of its responsibilities over administration and investments. The 401(k) plan is an operational matter and falls most prudently and organically with employees with expertise in finance, HR and legal. We recommend that employees who are not executive officers and who have sufficient time and expertise occupy these roles. Board members generally are not 401(k) plan experts on plan administration and investments.
Practice Note: In addition, it is critical that the charter of the compensation committee not give the committee any specific responsibilities regarding the 401(k) plan. If a benefits committee is named in the document as the named fiduciary then the charter must not require that the compensation committee review the benefits committee and the benefits committee charter should not require that it report to the compensation committee.
The benefits committee may want to adopt an investment policy with the assistance of its investment advisor (see below) and maintain adequate fiduciary insurance (at least $15 million – $20 million of coverage for a plan with $1 billion or more of assets). Furthermore, benefits committee members should be indemnified by the company from losses and litigation expenses not arising from misconduct/fraud.
To avoid claims for administration or investment breaches, we recommend that the benefits committee delegate its fiduciary duties in writing by appointing:
A lawyer who is an ERISA subject matter expert should review all the service provider contracts, the fiduciary insurance policy and the indemnification agreements.
All of these selections and appointments should follow a robust RFP with a good record of the selection criteria. The benefits committee should meet with its advisors on a quarterly basis to track investments and expenses and keep good minutes of the meetings. RFPs should be conducted every three years.
The foregoing best practices will reduce any risk of 401(k) class action litigation, reduce the risk that board members become involved in lawsuits but most importantly result in a retirement program that is appreciated and utilized by employees.