The surge in lawsuits against 401k and 403b plans over the past five years has primarily focused on plans with at least $1 billion in assets for obvious reasons: the more money and more participants, the greater the settlement or potential damage. But regional personal injury attorneys are sure to copy claims and filings against larger plans that are happy and willing to get smaller settlements because those organizations are less likely to fight.

So what can plan sponsors do to protect themselves?

The most important decision a small or medium-sized DC plan sponsor makes is choosing the right advisor. Although there are fewer dabblers or blind squirrels, many of the most experienced pension plan advisors still focus on the Triple Fs or fees, funds and trustee that have become commoditized, driving down fees, just like basic record keeping service fees have dropped.

But before we get too deep into RPA issues, let’s review some simple and relatively easy ways RPAs can help protect customers from lawsuits:

  • Costs – There are three main types of fees to focus on, including:
    • Record keeping: A solid first step is to ensure that the plan has received, read and fully understood its 408b2 (plan) and 404a5 (participant). Plans should regularly assess fees and periodically issue a request for proposals to the market which will vary depending on the size and complexity of the plan and changes to the organization or the CD industry, such as during the acquisition of a supplier.
    • Investments: While it is relatively easy to obtain data, it is more complex to ensure that the plans optimize the share class, which could include the availability of group trusts. The use of active investments requires a review of results and justifications for paying more than index funds which should be in the investment policy statement, another hedge. Some passive investments may be priced high relative to other peers.
    • Advisory services: As with other providers paid from plan assets, documented due diligence must be performed. Advisors typically assist with investment benchmarking and marketing and record keeping, but they cannot be relied upon to perform unbiased due diligence themselves. Using a third party who has to recuse themselves from being hired is the only way the plans can really protect themselves.

  • cyber security – In addition to ensuring that all vendors have safeguards in place to protect sensitive data and system access as outlined by the Ministry of Labour, plans must ensure that these providers have hack insurance that will indemnify the plan, and participants carefully review exclusions. Each participant who is hacked is a potential lawsuit.
  • Fiduciary insurance – Although Euclid claims that the cost of fiduciary insurance has not increased, deductibles are higher and limits have decreased, essentially the same thing. Either way, it is prudent to have fiduciary insurance to protect the company and the members of the pension committee.
  • Education and formation – At a minimum, the committee should receive training and access to self-study for new members as well as training for staff responsible for day-to-day management. Although educating participants has not proven effective, access should be provided as well as group and individual meetings.
  • Results – While good participant outcomes do not insulate plans from liability, just as good investment performance is not an absolute defence, it is important to know what can be accomplished with the ideal or automatic plan .

The biggest blind spot for plan sponsors, which is also the most important decision, is the selection and due diligence of their RPP. Most plans don’t know what to expect from their advisor, how to find a good one for their plan, or conduct proper and unbiased due diligence. There are limited resources and RPAs who tell their plans they can do careful due diligence on themselves, or worse still, it’s not necessary, open up to competitors more enlightened.

In addition to proper documentation, ensuring that fees are reasonable and that the plan is designed in the sole interest of participants, avoiding conflicts of interest and receiving appropriate disclosure from third parties are fundamental and common sense means to avoid liability. Easier said than done, as more and more RPAs are beginning to offer proprietary investments and member services.