Tips to Avoid 401(k) Lawsuits

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Tips to Avoid 401(k) Lawsuits

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For employers offering a 401(k) plan anxiety may be rising. Class-action lawsuits have been targeting an even wider variety of alleged breaches in fiduciary duties. Even colleges, universities, and small-sized plans are not exempt from the threat of these lawsuits.

In August there was a push into nonprofit education, with litigation filed against Cornell, Northwestern, University of Southern California, as well as Yale, New York University, Duke and Vanderbilt. Last year a lawsuit was also filed against a plan with only $9 million in assets due to the claim of unreasonable fees. With lawsuits against 401(k) providers on the rise, it is important to consider these risks of liability:

-The claim by participants that they were required to pay excessive fees
-Insufficient investment monitoring
-The failure to transfer employee deferrals into the plan in a timely manner
-Failing to inform participants of changes to the plan.

A recent survey by Fidelity Investments showed that 38% of small and mid-size plans are concerned about being sued, up from 24% last year (Fidelity Investments, Plan Sponsor Attitudes, Survey Results: 7th Edition). In response to this threat many plan sponsors are turning to consultants who specialize in retirement plans.

Almost 70% of plans surveyed by Fidelity Investments cited the importance for an advisor to take on the formal fiduciary role in their plan management. In the midst of confusing fee requirements and the need for extensive documentation, engaging a specialized advisor seems prudent.

Advisors can not only help the plan mitigate legal risks, but they can also help the plan sponsor to improve plan performance and engage more employees to participate in the plan.

Here are some best practices to avoid liability and litigation:

1. Ensure that participants are in the lowest-cost share class: The case of Tibble vs. Edison highlighted the importance of this responsibility. There is an ongoing fiduciary duty to do what is in the best interest of the participants. It is advisable to avoid fees that do not add commensurate value and make sure that all fees are reasonable. It is important to selected only appropriate investments based on the plan needs.

2.Document everything: Each decision made, change in the plan, and investment chosen should be documented. Keeping extensive records is now a necessity. It is helpful to be prepared to explain every decision made within the plan in order to reduce liability. Keeping minutes of all meetings where decisions are discussed is also advised.

3. Stick to the Investment Policy Statement: If an advisor prepares a formal Investment Policy Statement, it is important to stick to it. Even though this document is not required by the DOL, it can be useful in case of possible lawsuits. Again, this is all a part of the documentation process. The more that is documented, the less reasons there are to doubt one’s actions within the plan.

Avoiding lawsuits in a 401(k) plan is both possible and manageable. Employers may be able to mitigate risk through these best practices, as well as by engaging a registered advisor to help shoulder the burden. The fear of possible litigation should not overwhelm the daily operations of the plan.

Samuel J. Sweitzer
Samuel J. Sweitzer
Founder and President of Anson Analytics, Inc. - an RIA firm specializing in Research Based Investment Management for Corporate Retirement Plans and Private Investors. Sam is a Chartered Financial Analyst (CFA) and currently serves as Anson's Chief Investment Officer. Sam resides in South Metro Atlanta with his wife and two daughters.

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