Followers of our writings over the past few years know that we have been advising business executives who sponsor qualified retirement plans to pay closer attention if they want to avoid fiduciary liability.  The pace of lawsuits is gaining momentum as plaintiff’s attorneys intensify their focus in this area since a fiduciary breach is not that difficult to prove and the awards can be substantial.

Company owners and key executives with plan oversight are the responsible plan fiduciaries and as such, are held to the highest standard of care in decisions made for their plan. Not only must those decisions be in the exclusive, best interest of the plan, its participants and beneficiaries, but you must also be able to demonstrate that the processes used to select and monitor plan service providers and investment options were objective and conflict-free.  Potential conflicts must be identified and a process to manage those conflicts should be in place. Additionally, fees and expenses should be reasonable in lieu of services provided.  You may already have a great plan but unless you can demonstrate an objective due-diligence process you can still be in breach of your fiduciary duty.

Since there is an inherent conflict of interest between most service providers and their clients, company owners relying on those same service providers to act in the plan’s best interest may be playing a form of retirement roulette. Too many of todays’ plans are still chock full of expensive and mediocre funds and there has been no serious effort to conduct an objective analysis and competitive bidding process to improve those plans.  There are often revenue sharing arrangements between fund companies and other plan service providers that are opaque at best, and hidden at worst. These type of arrangements can put the interests of the service providers in direct opposition to the plan’s interests.

As an example, how is it possible for a $50 million plan to pay twice as much in total costs (as a percentage of plan assets) than a $5 million plan with virtually the same plan features and service providers?  It may be because the sponsors of the larger plan are not adequately educated, are too close to their service providers or, heaven forbid, in a quid-pro-quo relationship. The reasons won’t really matter because if a disgruntled current or former employee sues claiming a breach of fiduciary duty, the cost, distractions and negative publicity associated with defending will be significant, regardless of the outcome.  And heaven help a company owner who is receiving any economic benefit from a firm that is one of his or her plan’s service providers.  Their ability to claim a truly objective position may be mortally compromised.

Morgan Stanley was just sued for $150 million by its own employees for violating its fiduciary duty. The associated costs and negative publicity of mounting a defense may prove more than they had ever anticipated. Will you be next? How do you know?  Are your plan’s costs competitive? Is there any revenue sharing and if so, why? Are your funds best in class? Have you identified all conflicts of interest? Do you have an objective due diligence process in place to select and monitor your service providers?  Is that process documented? Unless you are confident that you can withstand a DOL inquiry or a plaintiff attorney’s deposition, you may need to become more pro-active with your plan.  Admittedly, it is a time consuming and unwanted distraction, but it will be a lot less distracting than the alternative.