$125M Warning to All 401(k) Plan Sponsors, Trustees, and Advisors.

This massive $125 million class-action lawsuit and DOL settlement against a 401(k) plan sponsor, its trustees, and its investment advisors is a warning to all plan sponsors, trustees, and advisors.

In an alarming trend, companies offering 401(k) plans (plan sponsors), their appointed trustees, and their plan advisors, are finding themselves blindsided by class action lawsuits. The lawsuits allege that they’ve failed in their fiduciary duties towards the plan participants. 

A significant number of these lawsuits are zeroing in on the investment decisions made, or not made, by the trustees. The financial implications of such lawsuits can be massive.

The term “blindsided” is apt since these plan sponsors and trustees are often uninformed about the rapidly increasing number of such cases (over 200 in the past two years alone). Most appear entirely unaware of the risks they’re exposed to and the measures they could adopt to safeguard themselves and their companies from these legal claims.

So, how can trustees and companies defend themselves against risks of which they are largely unaware? This article aims to address this critical information gap and propose some preventative steps that merit serious consideration. In the face of rising litigation, understanding these risks and taking proactive measures could mean the difference between financial security and potential financial and reputational ruin.

The recent case and settlement, featured in the 401(k) Specialist online magazine, has sent shockwaves through the industry. This professional publication, written for and read by those who serve 401(k) plans, highlights the stark realities that employers and trustees of 401(k) plans face.

As an employer or trustee, you likely do not consider yourself a “401(k) Specialist”, nor do you likely receive or regularly read this publication. 

That’s where we come in. Our mission at Trustee Empowerment & Protection, Inc. is to bridge this information gap and arm you with the knowledge needed to understand and better protect yourself from the risks associated with your fiduciary position.

This case spotlights genuine hazards often not discussed with you by your advisors, or casually dismissed as “unlikely to happen” to you and your plan. Let’s begin with this one.

Did the company or any of its plan trustees ever imagine that they would be sued and face such a massive potential corporate and personal liability?  If you are a trustee, you need to understand that such liability is unlimited . . . it’s to the full extent of your personal net worth. 

That answer would almost certainly be “NO.”  If they were aware – if they believed their risk of being sued was real – they might have taken protective actions to reduce their chances of being sued.

In the past two years alone, there have been over 200 similar class-action lawsuits against plan sponsors and trustees. Many, if not most, of these cases allege breaches of fiduciary duties in the investment-related decisions made by plan trustees. 

Were these facts communicated and explained to them by their advisors? Likely not.

As a C-suite decision maker of a plan sponsor company, or as a trustee, have these facts ever been disclosed and discussed with you?

As a plan trustee, consider these questions:

  • Would $125 million exceed the limit of your plan’s fiduciary liability insurance policy?
  • Would $125 million exceed the combined net worth of all your plan’s trustees?
  • How would you explain to your family that you’ve been personally sued for an amount exceeding your entire life’s savings and the allegations made against you?

A typical response is: “Well, we have fiduciary liability insurance to cover all of that.” Beyond the question of whether the coverage is sufficient (it may not be), is this. Your fiduciary liability policy (assuming you have one), does not cover the reputational damage you and your fellow trustees will suffer from being publicly accused of being a “bad fiduciary”. 

And then there’s the negative impact on your family as they grapple with inquiries about the fact that you’ve been sued. For many, if not most companies and individual trustees, they rightly consider their reputations to be their most valuable assets, more valuable than the money involved in these claims. Fiduciary liability insurance policies offer no protection against or compensation for any of this.

Here are some other crucial points of which you may be unaware:

In addition to the class-action lawsuit, the Department of Labor (“DOL”) also got directly involved. Unlike law firms that weigh cost-benefit ratios, the DOL isn’t resource constrained and can independently proceed against plan sponsors and trustees (i.e., you) on all ERISA (Employee Retirement Income Security Act) claims.

It only takes one disgruntled employee or ex-employee to represent all employee plan participants in an ERISA class-action lawsuit. With large employee bases, finding a disgruntled employee isn’t difficult. 

It’s important to note that the DOL doesn’t need a disgruntled employee to directly proceed against the company or you.

Delegating all investment decision-making to their investment advisor didn’t protect the company and trustees in this case. Trustees often mistakenly believe that such delegation is an effective defense. It’s not. Have your advisors explained that you?

Further, even if investment-related decision making is entirely delegated to your plan’s investment advisor, trustees (you) still have a duty to monitor the activities and performance of your investment advisor in that role. 

In this case, the DOL found that the company and individual defendants failed to monitor the investment manager’s activities properly. When delegating responsibility to their investment advisor, was the need to do so, and how to appropriately do so, ever adequately explained to them?

This case underscores the importance of awareness of the risks involved in your role as a trustee and of the need for proactive, protective measures to help in mitigating such risks. As a trustee, you need to take all of this seriously. None of the trustees that have individually been sued in this rising wave of class-action lawsuits likely ever believed that they would be sued.

While the rising tide of class-action lawsuits really is a growing and disturbing dark cloud, is there any silver lining in any of this? Absolutely. The first step towards self-protection is awareness. Now that you’re cognizant of these challenges, you’re in a significantly better position to take steps to safeguard yourself and your company against such claims. 

But how?  What steps can you take?

While it’s impossible to retroactively alter past investment decisions, armed with this newfound knowledge, you can proactively shape future decisions to better defend and enhance both your position and that of your company.

The first course of action is further educating yourself. We recommend exploring the resources available at Trustee Empowerment & Protection, Inc. (“TEPI”). A deeper dive into this material will reveal that merely relying on the advice of a single investment advisor doesn’t provide a complete defense against claims of fiduciary imprudence. 

As a trustee, you must have some means to ensure that your reliance on the advice of your investment advisor is reasonably justified. You must also (as is illustrated in this case) have a way to effectively “monitor” your investment advisor’s activities and investment results.  How can this be accomplished?

We propose two strategies, both underpinned by our patented decision-assistance technology:
First is the use of the newly available Professional RapidReview Tool℠ (ProRRT℠). This tool, initially designed for professional investment advisors, is now available to plan sponsors, trustees, administrators, and staff via TEPI. 

The ProRRT℠ enables you to objectively score and rank the investment choices within your plan against other available choice options within any covered asset class. Utilizing up to 48 performance parameters, you can identify those choices aligning best with your plan participants’ desired investment outcomes.

This process takes mere moments and the results can be of tremendous help during quarterly meetings with your investment advisor to ensure that underperforming options are identified and not allowed to remain in your plan (increasing your risks) for far too long. 

Given the fact that claims of chronic underperformance are now some of the largest of the claims being brought against plan sponsors and trustees, this is a critical step.

ProRRT℠ is affordable (less than $10,000), and its cost can be covered by the plan itself. It comes with training and professional consulting assistance to maximize its benefits. 

Using this tool to rid your plan of chronic underperformers should not only provide enhanced protection against fiduciary imprudence claims related to your investment decisions, it can often significantly improve investment results for all plan participants

You can also secure an Investment Choice Protective Review℠ (iCPR℠). This independent review is conducted by an investment advisory firm licensed and trained in using ProRRT℠ technology for comparative evaluations of 401(k) plan investment choices. TEPI serves as a conduit, connecting plan sponsors and trustees with these specialized advisors. 

Please understand that this service isn’t intended to replace your current investment advisor; instead, it offers a valuable, independent second opinion of the suitability of the investment choices offered within your plan. In situations in which your investment-related decision-making is questioned, such a second opinion can be extremely valuable.

These solutions are new, so it’s possible that your advisors are not yet aware of them. We urge you to share this information, as these strategies can also help protect them. With these protective measures in place, you can more confidently and safely perform your important role as a plan trustee.

Written by Eric Smith, J.D., President and an Investment Advisor Representative of Trustee Empowerment & Protection, Inc.,
A Registered Investment Adviser.  He is also Chairman & CEO of Decision Technologies Corporation.

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