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    Lessons from Retirement Industry Litigation

    If your organization offers a retirement plan to your employees, you assume fiduciary responsibility and that opens you up to a number of risks, including legal action. When you’ve worked in the retirement plan business as long as I have, you can’t escape the occasional breaking news story of a well-meaning company facing litigation involving their company retirement plan. The catalyst for action is usually a disgruntled former employee going to an attorney. The attorney most often looks for mutual funds with higher-than-average expenses based on the holdings information that is publically disclosed (IRS Form 5500). The attorney then multiplies that amount by six years (statute of limitation under ERISA). At that point, the attorney determines if it is financially worthwhile to file for legal action. To further complicate the matter, under the rules for a class action suit in the 401(k) world, just one person satisfies the rules for a class action suit because the class is easy to define (all current and former employees).

    Documentation and Neglect

    In discovery, the attorney looks for neglect (not replacing funds that are overpriced, underperforming, or have manager turnover) and lack of documentation (written recommendations from the advisor and/or committee minutes), to prove shortcomings in the basis for how decisions are made.

    Fortunately, the standard of fiduciary law under ERISA isn’t that your recommendations be 100% correct, but rather that you follow prudent standards (structure, discipline, and documentation) to prove that you have a process in place.

    Constructive Insight

    Unfortunately, in hindsight, it is easy to see the weaknesses that have been highlighted in these lawsuits for many company retirement plans. While the target for legal action has traditionally been very large retirement plans, there is room for improvement in most company retirement plans regardless of their size. If you are committed to the best interests of your employees and are at all concerned about how your advisor is managing your organization’s retirement plan, there are specific, proactive steps you can take to reduce your risk by conducting proper due diligence:

    1. Solve for Documentation

    Pick a random quarter from the past six years and ask your advisor for documentation such as:

    1. Investment Policy Statement

    2. Investment Monitoring Reports

    3. Investment Change Notices

    4. Meeting Minutes

    5. Due diligence questionnaires for each of your vendors to prove ongoing due diligence 

    2. Solve for Excessive Fees

    1. Request a fee proposal for your recordkeeping and advisory services.

    2. Ask if the investment options in your plan have lower cost versions (share classes). If there are, why hasn’t action been taken?

    3. Ask the previous question at your committee meetings and document next steps should there be room for improvement. Perhaps more importantly, document that the question was asked and that everything was confirmed to be in good order.

    4. Ensure expenses for all vendors are thoroughly understood and, if deducted from your plan, equitably applied to plan participants.

    3. Avoid Conflicts of Interest

    1. Make sure that your current investment advisor does not solicit your employees for other services.

    2. Ensure that solutions offered to employees are fully understood, especially with respect to fees/compensation.

    3. Request confirmation from all vendors that no conflicts of interest exist.

    Being a retirement plan sponsor comes with a great deal of responsibility, so when you place many of the decisions and due diligence in the hands of your investment advisor, it’s important that you regularly evaluate them to ensure they are acting in the best interest of you and your plan participants.

    Have you evaluated your retirement plan advisor lately? Download our Due Diligence Assessment to give you the tools you need to evaluate your advisor.

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    Retirement & Succession Plans

    Richard Allison

    Richard Allison brings more than 30 years of experience and knowledge to SWBC Investment Advisory Services. His team provides retirement plan solutions using a thorough process of investment research and providing another layer of consulting expertise to our clients.

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