401(k) Fiduciaries: Is it Time to Hone Your Processes? (Part One)

Last year was a signal year for ERISA fiduciary responsibility. And, no, I’m not talking about the DOL conflict of interest rules, although they of course were big. Here I will share with you some developments on the fiduciary responsibility litigation front that may require your attention. I know these developments have caused me to modify the advice I give to my clients. First, let’s briefly survey the world that has been created over the last 10 or 15 years.

401(k) Ecosystem

We have fee transparency. Fees have never been more knowable or available to plan sponsor fiduciaries for examination and comparison. The Labor Department fee disclosure rules issued back in 2012 are largely responsible for that. We now too have heightened public awareness. of fees and conflicts of interest. I’ve had Uber drivers explain to me the fiduciary rule. Plan sponsors and participants are fee and conflict-of- interest-aware. The finalized, now-in-limbo, DOL conflict of interest rules did that for us.

The public perception of brokers and advisers is generally negative, despite the good work done by many in the industry. We’ve had lots of lawsuits --- over 75 of them in the last 10 years. They have been entirely at the large plan level but last year one was filed against a plan with less than $10M in assets. Future litigation likely will reach smaller plans and how much farther downstream it goes depends on the remunerative value these cases to the plaintiff’s bar. Lastly, since 2000 average fees have deceased 30%. The competition is keen. In the midst of this and in defense against the risks of being a 401(k) plan fiduciary, fiduciaries have been advised to employ a “prudent process stratagem.” This defense may now need some fine-tuning.


 The Prudent Process Stratagem

ERISA describes fairly vague requirements for fiduciary conduct. It says that plan fiduciaries must act as a reasonable person familiar with plan matters would, familiar to use as the “prudent expert” rule. I mean by this that the statute (and the regulations) doesn’t tell fiduciaries what they must do. For example, what must fiduciaries required do when they hire service providers or pick investments? It would be nice to have instructions like the ones you get with that Ikea bookcase you bought. Plan fiduciaries, advisers, or ERISA attorneys have no such luck.

But ERISA attorneys have come up with an approach for advising their clients regarding the rule that has worked fairly well for a long time. We say follow a process that is reasonable one for the decision that it to be made and “make sure that you write down or document what you have done. If you are hiring a TPA, a reasonable process might include interviewing candidates, doing a background investigation, obtaining references from current and prior clients of the candidates, finding out what their competitors charge for similar services, and making them compete for the business through an RFI or RFP process. Engage in this type of process and there is a reasonable chance of later defending the decision and avoiding fiduciary liability. You have put yourself in a defensible position even if you don’t pick the lowest priced provider. That has been standard ERISA attorney advice for years.

Last year’s litigation suggests the advice does not go far enough. This is because it attacks 401(k) fiduciaries on the quality of their process and on outcome. The fiduciaries that were sued last year were for the most part doing what their lawyers told them to do. They followed a “prudent process stratagem” and entered into pretty low cost arrangements but they still got hammered with a lawsuit.

Before I go on and so that I do not overstate the threat of these lawsuits, be aware this litigation is in the early stages. The defendant fiduciaries may succeed in defending each and every one of claims made against them. But my point is a larger one. The litigation has widened and deepened the scope of the threat. Processes, as good as they have been in the past, may not be good enough now. Something more may be required that requires plan sponsors to look at a hard look at their existing practices and to improve them if necessary.

Areas of Vulnerability Targeted in the Litigation

So what has happened specifically in 2016 litigation that concerns me? There are three key threats:

  • Failure to leverage
  • Homework not done
  • You could have invested in this but you invested in that (shouda-coulda claims)

Each of these claims is really a quality of process type of claim. In my next post I’ll discuss these vulnerabilities in more detail and suggest ways 40(k) plan fiduciaries and advisers can defense against them.



Chuck Humphrey, Esq., is a former IRS and Labor Department attorney and the principal of the Law Offices of Charles G. Humphrey. He has provided counsel to plan sponsor and financial industry clients for over 35 years. He is also a consultant to Fiduciary Plan Governance and the author of A Guide to ERISA Fiduciary Responsibilities, available at ERISApedia.com.