retirement plan sponsor

Fiduciary Duties of Retirement Plan Sponsors

February 18, 2022
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The U.S. Supreme Court has issued an opinion that could impact retirement plan sponsors of defined contribution plans and 401(k) plans.

“Even in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.”

–Supreme Court Justice Sonia Sotomayor

Reversing the decision of a lower court, a U.S. Supreme Court decision published January 24, 2022, determined that the Committee responsible for administering the two defined contribution plans at Northwestern University, had breached their fiduciary duties as the retirement plan sponsors.

Key points of the Supreme Court decision include:

The following article by Smith & Downey, P.A., was published late last month as an e-alert. The article dives deeper into the Supreme Court Ruling and also offers recommended actions for plan sponsors. The full article is shared below with permission from Smith & Downey.  

  • Retirement plan sponsors that offer too many investment options in a 401(k) plan, could, in some circumstances, be considered in breach of a plan fiduciary’s duty to monitor investments. Note: “too many” is not defined.
  • 401(k) plan sponsors are responsible to monitor the reasonableness of the fees of all investment options offered within the 401(k) plan. The inclusion of low-fee options is not sufficient to cover the responsibility of reasonableness.

U.S. Supreme Court Ruling May Cause More Fiduciary Lawsuits

On Monday, January 24, 2022, the U.S. Supreme Court issued a long-awaited opinion (Hughes v. Northwestern University) on issues implicated by the avalanche of lawsuits over the past few years in the lower courts.

The lawsuits allege that plan fiduciaries (e.g., plan sponsors, plan decision makers, plan advisors) have permitted their retirement plans and health and welfare plans to pay “excessive” administrative and investment-related fees, and/or permitted poorly performing investments to remain in their plans.
 
The bad news is that the Supreme Court’s decision likely will result in an increase in the number of lawsuits with these claims, and will make it more difficult for a fiduciary to win at the motion to dismiss stage of litigation. This is critical because most litigation costs are incurred after the motion to dismiss stage and the threat of these costs may result in a higher settlement value to avoid those costs.
 
The good news is that we now have this decision, as well as the Supreme Court’s prior decision in Tibble v. Edison Int’l, 575 U.S. 523 (2015) (which ruled that “a fiduciary is required to conduct a regular review of its investments”), as guides for plan fiduciaries to follow to meet ERISA[i]’s fiduciary duty of prudence (and hopefully fend off any threats of litigation).

While procedurally complicated, the essential takeaways from the Supreme Court’s unanimous decision are as follows:

  1. Simply providing a diverse menu of investment options, providing low-cost investment options (along with higher-cost investment options), and giving participants complete discretion over the selection of investment options, is not sufficient to satisfy ERISA’s fiduciary duty of prudence.
  2. Determining whether plan fiduciaries failed to meet their ERISA duty of prudence requires a “context-specific” inquiry of the “continuing duty to monitor investments and remove imprudent ones”.
  3. Fiduciaries must conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of investment options.  
    Note:  We see, as an example, that many plan fiduciaries simply add “ESGs[ii]” to investment lineups and assume it is prudent because there are other funds in the same investment category that clearly meet the prudent selection requirements. This Supreme Court decision states clearly that all funds, including ESGs, must stand on their own as prudent investment options.
  4. Offering too many investment options (over 400 in Tibble) can cause participant confusion and poor investment decisions, which can result in a failure to meet ERISA’s fiduciary duty of prudence.
  5. If the fiduciaries fail to remove an imprudent investment option within a “reasonable time”, the fiduciaries fail to meet ERISA’s fiduciary duty of prudence.
  6. Fiduciaries must apply these same standards to recordkeeping fees.
  7. These determinations are all made based on “the circumstances . . . prevailing” at the time the fiduciary acts.

We (Smith & Downey, P.A.) continue to advise that the fiduciaries of retirement plans, and health and welfare plans, can protect themselves and their plans against these types of claims by taking proactive actions and documenting that these actions have been taken. (For more information about the evolving health and welfare plan fiduciary landscape, please see our prior e-alert from earlier this month. (www.smithdowney.com/early-2022-to-do-employer-fiduciary-responsibilities-for-health-welfare-plans/)


1. Ensure that your company has a very clear fiduciary apparatus (e.g., a plan administration committee) in place to oversee and discharge all ERISA duties and best practices.

2. Ensure documents and processes have been implemented that govern vendor selection and monitoring, investment and vendor fee review, and investment selection and monitoring.
3. Ensure that the documentation and processes include a regular review by the fiduciaries of the investments, vendors, and fees.

4. Ensure that the plan fiduciaries’ decision-making behavior conforms to the controlling documentation and processes.

5. Schedule regular legal training for plan fiduciaries regarding their responsibilities and the steps they should take to best position the employer and the fiduciaries on these issues.

6. Review investment provider and other service provider agreements, insurance coverage, and indemnification provisions for adequacy.

7. Periodically engage in an independent fiduciary review of plan fees and vendor performance.

8. Carefully review and revise minutes of fiduciary committee meetings to ensure accuracy and to document that plan fiduciaries are following the controlling documentation and processes.

9. If there are any concerns about prior years, take corrective steps to ensure appropriate risk management. 


 

[i] ERISA Employee Retirement Income Security Act (www.dol.gov/)

[ii] ESG Environmental, Social, and Governance criteria

Other sources: Wall Street Journal “Supreme Court Rules for Northwestern Employees in Retirement-Plan Case”


This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.

Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through Lion Street Advisors, LLC (LSA) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI and LSF/LSA are non-affiliated entities and separate entities from OneDigital and Fulcrum Partners.

Unless otherwise noted, VAI/VSI, LSF/LSA are not affiliated, associated, authorized, endorsed by, or in any way officially connected with any other company, agency or government agency identified or referenced in this document.

Lion Street Advisors // Lion Street Financial

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