In the decade stretching from 2009 through 2018, about 83,000 lawsuits were filed under the Employee Retirement Income Security Act of 1974 (ERISA) in federal district court.1 Typically these suits involved employees suing retirement plan sponsors—as well as benefits plan committees and other individuals deemed fiduciaries—over alleged plan mismanagement. Only 2% of those cases went to trial, but some resulted in multimillion-dollar settlements or judgments, and in many cases, plan sponsors' reputations suffered.
Legal experts say there are no signs of ERISA litigation slowing down, and organizations of all sizes are at risk. In addition, plans can be targets of audits by regulators, which can result in expensive settlements and penalties. To avoid potentially substantial legal and regulatory costs and reputation-tarnishing headlines—as well as possible plan disqualification and harm to plan participants—plan sponsors and their fiduciaries need to be diligent in understanding and fulfilling their duties.
Each company names a fiduciary for its ERISA retirement plan in the plan document. However, others the company doesn’t officially name often are also legally considered fiduciaries. Fiduciary status can be imposed by the courts on anyone who exercises discretion or control with regard to the plan. Indeed, who qualifies as a fiduciary is often subject to legal interpretation.
Retirement plan committee members and company directors are often fiduciaries, but not always. For example, there are some committees where members only serve in advisory or fact-gathering roles rather than in a voting capacity. They may not be fiduciaries.
In addition, the courts may determine that others outside of the committee or board of directors are fiduciaries—such as plan administrators required to make discretionary decisions. Defendants in ERISA suits against large corporations also often include human resources executives.
The law defines the fundamental duties of a plan fiduciary under ERISA as:
Failure to perform any of these fiduciary duties may constitute a breach.
Plan fiduciaries are also subject to co-fiduciary liability under ERISA. This means the law may hold them responsible for the actions of other fiduciaries if they knowingly participate in, conceal, enable or know of any fiduciary misconduct and fail to take steps to correct it.
In addition to identifying all plan fiduciaries, as we discussed above, companies can take a number of steps to protect themselves against plan-related financial risk, including:
Adopting a charter for the retirement plan committee. One of the most important risk-mitigation best practices is adopting a committee charter. The charter should identify who's on the committee, affirm the committee's authority and define its specific responsibilities, describe the process for appointing and replacing members, and establish meeting frequency.
Documenting your decision-making process. The committee makes important discretionary decisions such as hiring, retaining and dismissing service providers for the plan, and selecting plan investment options. To be prepared for any potential future litigation or regulatory audit challenges, committee members need to be able to demonstrate a committee decision was informed at the time it was made, reasonable based on all obtained information, and documented with minutes and records.
Engaging a qualified investment advisor. Professional investment advice can help you meet all of your fiduciary duties related to plan investments, including ensuring investment offerings are adequately diversified and meet the risk criteria set out by the company's retirement plan investment policy statement.
Considering fiduciary liability insurance. Insurance coverage doesn't absolve fiduciaries of their ERISA-mandated obligations, but it can provide a last line of defense against loss related to legal or regulatory decisions. Some companies have a rider on their directors and officers liability policies that provides protection against ERISA-related claims and may not need additional coverage.
Complying with section 404(c) of ERISA. This section of ERISA insulates employers from lawsuits related to participants’ individual investment decisions. To earn protection under 404(c), the plan sponsor must follow some basic requirements, such as offering a sufficient number of investment options and including proper disclosures in plan documents.
Retirement plan offerings are critical to attracting and retaining talented employees. Yet the rules and regulations governing these plans are many and complicated, and failure to live up to fiduciary duties can be costly. Sponsors are wise to look for professional assistance in managing retirement plan financial risk and ensuring plans are equitable for all employee participants.
Most plan investment advisors focus strictly on providing counsel regarding investments. BB&T Institutional Investment Advisors, on the other hand, takes a more holistic approach, offering a range of retirement plan consulting services aimed also at helping sponsors meet their fiduciary duties and reduce related financial risk. We provide consulting related to fiduciary governance, including executive fiduciary training; investments, including fee benchmarking and guidance on developing an investment policy statement; plan design; and participant communications. To learn more, contact your BB&T relationship manager.
A highly acquisitive health care provider faced a range of fiduciary risk and related challenges in managing its growing number of employee retirement plans. In 2013, the company turned to BB&T Institutional Investment Advisors, the nondiscretionary 3(21) investment advisor for its primary plan, for broader retirement plan consulting. Among other things, BB&T standardized the various plans and recordkeeping platforms the company was regularly bringing on board through acquisitions.
The ensuing five years of growth intensified those challenges. During that period, the market value of the sponsor's plan assets tripled to about $2 billion and the number of its plan participants doubled to around 12,000. Here's a look at how BB&T has helped the company reduce fiduciary risk and foster consistency across plans in four key areas:
Fiduciary governance: BB&T completed a fee analysis and industry benchmarking leading to standardization of fee structures across the company's multiple plans. BB&T consultants also provided fiduciary training as well as support through the company's Department of Labor audit, including working with the company's recordkeeper to implement process changes required by the auditor.
Investment: The investment options and services across the company's plans varied. Some plans offered participants a self-directed brokerage option, while others didn't. In addition, some—but not all—offered company stock as an option. What's more, company stock was the only option in one plan, which was problematic from a fiduciary perspective.
To the greatest extent possible, BB&T has standardized a diverse set of investment and service offerings across all company plans, including supporting negotiations that succeeded in adding a core lineup of investments to the union plan. In addition, the bank's consultants worked to make lower share classes (with lower fees) available to all participants, supported due diligence and selection of a target date fund manager, and worked with the company to construct a comprehensive investment policy statement.
Plan design: In addition to executing a plan design standardization project to create consistency in plan benefit offerings, BB&T completed a full brokerage analysis that resulted in plan design amendments to ensure all employees participate equally in fees across the various plans.
Participant communications: BB&T implemented an annual communication strategy to ensure delivery of a consistent message to all plan participants.
For more information, please contact your BB&T relationship manager.