Litigation Storms Impacting the 401(k) Climate

401(k) plans have been in the news a lot this past year, with 11 lawsuits filed against plan sponsors or providers in the fourth quarter of 2015 alone. Common problems alleged include improper revenue-sharing, excessively high fees charged to plan participants, and a focus on high-cost mutual funds when lower-cost options are available. All of the lawsuits seek class-action status and millions of dollars in damages. While so far the focus of lawsuits has been on sponsors of large plans, such as Oracle, Anthem, and Reliance Trust, it is only a matter of time before these effects begin to trickle down, and smaller companies become targets as well.

This kind of news can be worrying, and with these issues in mind, here are steps you can take with your own plan to help guard against potential litigation.

  • Understand Your Fiduciary Responsibility
    Even if you have hired strong service providers to manage your plan, you still bear fiduciary responsibility to your plan participants. Understand what is happening with your plan and communicate regularly with your service providers.
  • Stay On Top of Investment Selection
    Regularly review the investments in your plan. Select investments that have a well-documented performance history, and routinely monitor them to ensure that they are continuing to perform well. Don’t select high-cost retail classes of funds when identical, lower-cost institutional classes are available, as this generates unnecessary fees for your plan participants. Finally, pay attention to the big picture when selecting your investments—don’t select (or reject) investments based entirely on the associated fees. Examine overall value to see if the investment is a good fit for your plan.
  • Evaluate Your Service Providers
    Similar to your investments, you should also regularly review your service providers to verify that you are getting competitive market rates for their services, and not paying excessive fees.
  • Be Careful With Revenue Sharing
    Paying service providers through a revenue sharing model is not illegal, and not necessarily problematic. However, problems do arise when the revenue generated for services (i.e. recordkeeping) outstrip the value of the service. These problems can be avoided by either paying your service providers a flat fee, or by instituting a cap on revenue sharing, and kicking any excess revenue generated back into the plan, where it can continue to benefit plan participants.
  • Document, Document, Document
    Perhaps the most important step you can do for your plan is to draft a strong Investment Policy Statement and plan governing documents, and follow them closely when making all investment decisions. Be clear about your reasoning behind which funds and service providers you select for your plan. This may seem like a time-consuming process, but ultimately it is one of the most important ways to maintain a healthy plan that will keep you out of the storm.

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