401k Plan Sponsors Win Another Round in Class Action Lawsuits
A class of 401(k) participants (“the plaintiffs”) brought suit against United Technologies Corporation (UTC) and the committees that monitor the investments and administration (as plan sponsor) of its 401(k) plan. The suit alleged various breaches of fiduciary duty under ERISA including:
On March 3, 2009, the United States District Court for the District of Connecticut held in favor of UTC. The court’s decision echoed ERISA’s prudence standard which, simply put, requires qualified plan fiduciaries to execute their duties with “care, skill, prudence, and diligence” in the best interests of the plan participants.
Investment Losses
On the issue of investment losses inside of a stock fund, the court held that the determination of prudence is:
Excessive Fees and Expenses
Regarding reasonable fees and expenses, the plaintiffs argued that, after taking into account fees, actively managed mutual funds will with “near certainty” underperform lower-fee index funds. Further, the plaintiffs faulted UTC for not creating an Investment Policy Statement.
The court held that fiduciaries are not required to follow any particular course of action so long as the decisions meet the prudence standard – this prudence is defined by the analytical process undertaken. Regarding the “need” for the Investment Policy Statement, the court simply noted that “ERISA does not require a fiduciary to create such a document.”
One additional factor that worked in the favor of the plan sponsor was that it had requested and evaluated various recordkeeping service contracts as a mechanism for monitoring the reasonableness of base fees and income received by service providers from mutual funds.
Misleading Information
The plaintiffs alleged that the plan sponsor made misleading statement to participants by not fully disclosing the fees and expenses of the investment options including sub-transfer agent payments.
The court held that:
Imprudent Investment Options
The plaintiffs argued that separate trust accounts were better for participants than mutual funds. The court ruled that the mere fact that better performing, lower cost options exist does not mean the investment vehicles are equivalent. The selection process for determining a plan’s investment, if prudent and reasonable, generally, will meet the requirements of ERISA.
While an important consequence of this decision is that it did not expand the responsibilities of plan sponsors, it also reinforces that the process is more important than the outcome. The process carries with it great responsibility.
Plan sponsors, as fiduciaries, should:
The process and decisions can be documented by:
The keys to ERISA procedural compliance are understanding the right questions to ask, when to involve outside experts, and how to effectively and succinctly communicate with participants.
While this most recent holding was favorable to employers, this is not the time for clients to relax. Many cases are still pending and the outcomes could vary from court to court. Every plan sponsor should take a serious look at their fiduciary responsibilities related to retirement plan investments and take steps to limit litigation exposure.
- Investment losses based on the composition of investments held in a stock fund
- Payment of excessive recordkeeping and administrative fees as well as excessive management and brokerage fees
- Providing participants with confusing, false, and misleading information generally regarding fees and expenses, and for
- Inclusion of imprudent investment options
On March 3, 2009, the United States District Court for the District of Connecticut held in favor of UTC. The court’s decision echoed ERISA’s prudence standard which, simply put, requires qualified plan fiduciaries to execute their duties with “care, skill, prudence, and diligence” in the best interests of the plan participants.
Decision highlights:
Investment Losses
On the issue of investment losses inside of a stock fund, the court held that the determination of prudence is:
- Not determined in hindsight, and
- Less concerned with results than the actions taken by the fiduciary at the time the decision was made.
Excessive Fees and Expenses
Regarding reasonable fees and expenses, the plaintiffs argued that, after taking into account fees, actively managed mutual funds will with “near certainty” underperform lower-fee index funds. Further, the plaintiffs faulted UTC for not creating an Investment Policy Statement.
The court held that fiduciaries are not required to follow any particular course of action so long as the decisions meet the prudence standard – this prudence is defined by the analytical process undertaken. Regarding the “need” for the Investment Policy Statement, the court simply noted that “ERISA does not require a fiduciary to create such a document.”
One additional factor that worked in the favor of the plan sponsor was that it had requested and evaluated various recordkeeping service contracts as a mechanism for monitoring the reasonableness of base fees and income received by service providers from mutual funds.
Misleading Information
The plaintiffs alleged that the plan sponsor made misleading statement to participants by not fully disclosing the fees and expenses of the investment options including sub-transfer agent payments.
The court held that:
- ERISA does not require that the plan sponsor disclose sub-transfer agent fees.
- The plan sponsor did not make misleading communication to the 401(k) plan participants.
- No breach of fiduciary duty or conflict of interest exists simply because UTC’s recordkeeping expense was diminished by participant investments – ERISA expressly contemplates fiduciaries with dual loyalties.
Imprudent Investment Options
The plaintiffs argued that separate trust accounts were better for participants than mutual funds. The court ruled that the mere fact that better performing, lower cost options exist does not mean the investment vehicles are equivalent. The selection process for determining a plan’s investment, if prudent and reasonable, generally, will meet the requirements of ERISA.
While an important consequence of this decision is that it did not expand the responsibilities of plan sponsors, it also reinforces that the process is more important than the outcome. The process carries with it great responsibility.
Plan sponsors, as fiduciaries, should:
- Meet regularly to discuss the plan’s administration and investments.
- Document the process and meetings.
- Document all decisions.
The process and decisions can be documented by:
- Developing and following an investment policy statement,
- Performing regular benchmarking of fees, expenses and services provided, and
- Periodically obtaining quotes for services from various mutual funds and vendors.
The keys to ERISA procedural compliance are understanding the right questions to ask, when to involve outside experts, and how to effectively and succinctly communicate with participants.
While this most recent holding was favorable to employers, this is not the time for clients to relax. Many cases are still pending and the outcomes could vary from court to court. Every plan sponsor should take a serious look at their fiduciary responsibilities related to retirement plan investments and take steps to limit litigation exposure.
