Maintaining good fiduciary oversight is key to operating an investment program for another business entity. This is especially the case for 401(k) plan sponsors who make investment decisions affecting client firms’ employee retirement plans, according to Hauser Insurance Group.

Increasing Cases of Class-Action ERISA Litigation

Over the past few years, there has been an increasing number of class-action lawsuits within the context of the Employee Retirement Income Security Act of 1974 (or ERISA). This federal law established minimum standards for many private industry retirement and health plans. The law was designed to protect the interests of each plan’s members.

In 2020, almost 100 ERISA lawsuits were filed, each alleging a breach of fiduciary duty (mostly) relating to 401(k) plan administration. Specifically, according to liability experts at Hauser Insurance, the suits often allege that plan sponsors charged excessive fees to the respective plan’s participants. Similar 403(b) suits were filed on behalf of prominent universities’ plan members.

Each lawsuit is expensive to litigate, and cases can often last for several years. To avoid this undesirable outcome, many large corporations have opted to settle out of court. This has proven to be a costly decision, with at least 15 companies paying out $100 million (or more) in ERISA payout amounts.

Although many plan sponsors manage their investment portfolios with integrity and transparency, there is still no guaranteed immunity from a lawsuit. Therefore, sponsors should strongly consider additional strategies to minimize their risks. Implementation of multiple layers of protection is recommended.

Updated Internal Documentation and Training

In the event of litigation, a court will rigorously evaluate the sponsor’s efforts to comply with its fiduciary obligations. This examination will focus on all phases of the investment process. A sponsor that demonstrates an ongoing commitment to compliance will certainly strengthen its case.

Ideally, a plan sponsor will complete ongoing training regarding its fiduciary obligations. The company will clearly document its policies and rationale for making specific investment decisions. Finally, the sponsor should provide complete transparency about the plan’s fees, setting a benchmark and ensuring compliance in future transactions.

Delegation of Certain Fiduciary Functions

Under the ERISA standards, a plan sponsor can delegate specific fiduciary obligations to a third party such as a plan administrator and/or investment manager. This managing fiduciary will maintain complete discretion and authority over the plan’s investments. Further, the third party will assume the liability for the investments’ management.

Delegating plan management responsibilities may be a prudent strategy that demonstrates the plan’s sponsor’s commitment to compliant plan administration. However, the sponsor must still meet the strict ERISA standards even if a third party is performing the actual plan administration functions.

Thus, a plan sponsor should carefully review plan administration candidates. A provider with demonstrated investment expertise, and experience with related plan activities, is in a better position to defend itself.

The sponsor should ensure that the managing fiduciary maintains its own insurance coverage. The plan sponsor’s organization should be listed as an insured.

Close Adherence to an IPS

The United States Department of Labor’s ERISA-related guidance supports the implementation of a written Investment Policy Statement (or IPS). This document helps to create a structure within which fiduciary oversight can occur. The IPS also helps to form a basis for future investment-related decision making.

Specifically, the IPS should outline the prudent process by which the organization selects and monitors its investments. If a third-party service provider is involved, the ISP outlines how the plan sponsor will oversee that entity’s performance. The ISP also mitigates the impact of committee members’ often-different understandings of the plan’s structure and provisions.

Note that ERISA does not require the establishment of an IPS. However, the Department of Labor does regard its use as a best practice.

Equally importantly, realize that an organization can be exposed to increased risk by its failure to follow established IPS provisions. This may also be construed as an ERISA violation. To avoid that outcome, the plan sponsor should carefully choose its IPS statement language.

Purchase of Fiduciary Liability Insurance

A well-crafted fiduciary liability insurance policy will protect fiduciaries from numerous investment mismanagement allegations and associated fiduciary legal liability. Lawsuits frequently result from alleged breaches of fiduciary duties.

In addition, employee benefit plan fiduciaries can face lawsuits that stem from administrative errors or omissions. The fiduciary liability insurance policy will protect the plan sponsor along with named fiduciaries and will cover 401(k) lawsuit-related expenses.

Typical covered claim allegations include negligent benefit plan administration, substandard investment decisions, and improper retirement funds usage. If a plaintiff charges that the plan sponsor charged excessive fees, that claim is also covered. If a plan sponsor does not monitor a third-party vendor or service provider, the insurance policy will also protect against those claims.

With that said, a knowledgeable liability insurance professional should carefully craft each policy to meet the client’s specific risk-related needs. To determine those requirements, the insurance agent should employ a consultative approach.

Companies that offer employee benefit plans, including retirement plans and medical/life/disability plans, should carefully consider obtaining coverage.

Hauser Insurance Group is a recognized authority on fiduciary liability insurance and its applications.

Compliance with ERISA’s “Safe Harbor” Requirements

Plan sponsors should ensure that the plan meets the ERISA Section 404(c) “safe harbor” requirements. When a specific plan complies, the sponsors and fiduciaries are relieved of liability for losses that arise from participant-directed investment.

However, qualification for “safe harbor” status involves compliance with numerous plan requirements. These criteria relate to plan design and administration along with selected investment options. Participant disclosures are also a factor. In most cases, a diligent recordkeeper and/or third-party plan administrator will ensure compliance.

Use of Available QDIA Protections

In the Pension Protection Act of 2006 (Section 624), the Department of Labor (or DOL) established the Qualified Default Investment Alternative (or QDIA) safe harbor. This provision allows plan sponsors or administrators to make default investments for participants who fail to make their own investment elections.

QDIAs can include a balanced fund, target date fund, or professionally managed account. The plan sponsor or administrator must also satisfy other regulatory requirements to obtain safe harbor relief. These include prudent QDIA selection criteria, participant notification, and consistent investment performance-monitoring activities.

Class-Action Waivers and Arbitration Agreements

Plan sponsors may now include language that requires participants to waive their right to join in a class-action lawsuit. The waiver language will generally appear in the plan’s next amendment cycle.

In addition, plan sponsors should consider designating a benefits committee as the plan’s fiduciary, instead of the company’s CEO or other officer. A lawsuit’s plaintiff may allege that a corporate executive held insider information that prevented them from fulfilling their fiduciary duties.

Each plan should also clearly state a claim’s time limits. This text provides an additional defense in cases with unusually long intervals between the alleged event and the claim filing.

The plan document provisions should require participants to initiate fiduciary breach litigation on a case-by-case basis. The provisions should also prevent the filing of legal actions in court (as opposed to arbitration).

Ideally, the referenced clauses should be included at the plan’s inception. When the clauses are inserted as amendments, the sponsor may be required to demonstrate that participants were notified of the change. If an affected employee has left the company, the plan sponsor may find it difficult to comply with this requirement.

By taking one or more of these proactive steps, plan sponsors will be better prepared for a potential ERISA-related lawsuit. Hauser Insurance Group maintains extensive expertise in the specialized fiduciary liability arena.

About Hauser Insurance Group

Hauser Insurance Group is a privately held insurance firm headquartered in Cincinnati, Ohio. Since 1971, this multifaceted company has provided insurance solutions, risk management, and employee benefits services to a diverse selection of clients.

The Company also maintains offices in Atlanta, Chicago, Kansas City, Los Angeles, New York City, and St. Louis. With proximity to clients in these regional markets, Hauser is well positioned to serve clients throughout the United States.

Hauser’s Diversified Client Base

The Hauser Insurance Group client base includes public companies, family-owned industrial businesses, and publicly traded retail entities. Special-purpose acquisition companies (or SPACs) and multinational corporations also appear on Hauser’s client roster.

Hauser Insurance Group also focuses strongly on private equity firms, their respective portfolio businesses, and their targeted acquisition companies. Current clients include 70 private equity firms in 44 states. In 2020, Hauser was integral to the execution of nearly 200 private equity transactions.

Specialized Advisors and Core Competencies

Hauser’s team of specialized advisors has received national recognition. This experienced group of professionals includes merger and acquisition experts, risk advisors, and brokerage professionals with expertise in private equity consulting and brokerage functions.

Hauser is recognized for its substantial due diligence competencies in the insurance solutions and employee benefits arenas. The Company also maintains strong expertise in the insurance brokerage, risk management, and transactional support disciplines.

Hauser Insurance Group believes that a consultative approach will provide each client with optimum results. By analyzing each firm’s needs, and recommending the targeted product(s) that address those requirements, the client will be well prepared for a successful merger, acquisition, or other business challenge.

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Fiduciary liability insurance enables 401(k) plan sponsors to protect themselves against litigation. Hauser Insurance Group has expertise in this specialty.