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

In my previous post I identified three key areas of vulnerability arising from last year’s ERISA litigation. In this installment I’ll discuss these vulnerabilities in more detail and suggest ways plan fiduciaries can defense against them and reduce their exposure to liability.

The vulnerabilities are: 

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


Failure to Leverage

Leverage is conventionally defined as the power or ability to act or to influence events or decisions. Use of leverage or failure to use it, is a pretty classic problem and simple to understand at a basic level. Advisers know they need to find for their clients providers, investments, and fee arrangements that are competitively priced. Paying more for services and investments than what is paid by similarly situated plans brings into question whether the plan’s power of leverage has been fully utilized.

Bell v. Anthem asks the question how much leverage is enough leverage? In Anthem the plan fiduciaries worked out a pretty good deal for the investment of plan assets in Vanguard funds with 4 bps in fees when average fees for similar funds were 25 bps. That wasn’t good enough for the plaintiff participants. They said they looked around and found the plan fiduciaries could have gotten 2 bps. This “failure” they claimed cost the plan $18M dollars. Most neutral observers would say that 4 bps is a pretty low and pretty reasonable, especially when average fees for similar funds were around 25 bps. We don’t know all the facts of this case. That will come out in pleadings if there is not a settlement before that. But we know a few things. The Anthem fiduciaries negotiated pretty reasonable fees for the their plan. Those fiduciaries now are the defendants in a lawsuit they must defend at considerable cost and exposure to risk, and that the quality of their process is now in question. Did their process sufficiently exploit the leverage of $5B in assets? Was it sufficiently procedurally prudent? The Anthem fiduciaries may find out the answers to these questions?

Have You Done Your Homework? 

blog_image_7.pngIt’s not possible for anyone to make a good decision without understanding the facts except perhaps by dumb luck. For plan fiduciaries to make decisions without understanding cost, the market, or other factors relevant to a decision is obviously to act irresponsibly. In Johnson v. Fujitsu the fiduciaries of the company’s group defined contribution plan were remiss, if the complaint is to be believed, in just that aspect. These fiduciaries managed to fashion one of the most expensive large plans in the country (paying more than three times the average fees for similarly sized plans) without considering the availability of lower cost options.

Similarly in the Ellis v. Fidelity Management participants in the Barnes & Noble plan claimed that the plan’s SVFs was a bad investment because it deviated from the typical investment mix for SVFs. This suit was against Fidelity as the plan’s investment manager but just as well might have been brought against the plan sponsor fiduciaries. Did those fiduciaries do the work do understand whether the SVFs were appropriately allocated and that the investment manager was following the stated investment objectives of the funds.

If the allegations in these cases are proven true, it’s hard to find better examples of what it means to fail to do your homework.

Shoulda-Coulda Claims 

What does a 401(k) plan fiduciary do when a plaintiff/participant says that you should have invested in a stable value fund instead of a money market fund or conversely in a money market fund instead of a stable value fund? These are the questions facing the fiduciaries in the Pledger v. Reliance and White v. Chevron.

 In Pledger the plaintiffs said that the money market funds could not keep up with inflation (had the plan been invested in a stable value fund, it is claimed, the plan would have realized an additional $14M). In Chevron the plaintiffs say that fiduciaries plan breached their fiduciary duty by offering a Vanguard money market fund instead of a stable value fund. The fiduciary’s decision to offer the Vanguard money market fund instead of a stable value fund they say cost plan participants $130 million.

These cases suggest that it would be a good idea to incorporate into the fiduciary process consideration of the factors why the selected investment was preferred over alternatives. If plan fiduciaries don’t backstop their decision making with this type of analysis, they may leave themselves exposed to the argument that the investments not chosen would have done better and a shoula-coulda claim.

Advisers Can Help Plan Fiduciaries

So what do these developments mean for 401(k) plans and their advisers? It’s pretty obvious that excess fees expose plan fiduciaries to liability. The 2016 litigation shows that plaintiff attorneys are homing in on the quality of plan sponsor processes and decision-making on plan services and investments. It’s also clear that plan fiduciaries are exposed to claims of fiduciary failure for significantly long periods of time. This was confirmed by the U.S. Supreme Court’s decision in Tibble v. Edison. This means that plan sponsors are going to have to work on refining the quality of their processes if they are going to be able to avoid litigation or reduce its costs.

The good news is that advisers are perfectly positioned to help plan fiduciaries protect against these threats. Advisors can help them 

  • Establish and run processes that demonstrate they have leveraged the lowest cost fees based on their plan size and servicing needs. If the fees their plan pays exceed market norms, they need to be able to show why the fees are reasonable. You can help them with this
  • Be market aware and have a basic understanding of industry fees and practices.
  • Articulate why one investment was chosen over the other
  • Dig down deeper in understanding whether actual fund plan investments align with investment objectives. For example, is a TDF actually being invested consistent with its investment objectives or has the fund deviated from its objectives to make up losses or catch a current trend?
  • Run investment and service provider searches taking advantage of industry knowledge and their benchmarking, RFI and RFP capabilities and expertise to get the best-priced services and investments for clients

If you are already assisting your clients with their fiduciary processes, these ideas are baby steps for you. It’s just a matter of emphasizing the processes you already have in place. If you are new to 401(k) plans, you can start by reading up on basic fiduciary practices or get a fiduciary accreditation. There are some really good resources and fiduciary experts out there to help enhance your value to existing and potential clients.


Chuck Humphrey is principal of Law Offices of Charles G. Humphrey, a firm concentrating its practice in the field of employee benefits and fiduciary law. He is the author of the Fiduciary Responsibility eSource available at ERISApedia.com.