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Avoid Litigation with Attention to Common ‘Red Flags’
James Quaid

Any size retirement plan can run into serious trouble when sponsors are not careful. With some planning, however, your qualified retirement plan can take steps to avoid ERISA litigation. A reminder of the most common “red flags” leading to litigation might be helpful.

Reasonable Expenses
Although plan sponsors cannot assure consistently strong investment performance, you can, and must, ensure that expenses are reasonable.

When your plan’s investment portfolios are performing well, it is easy to pay less attention to the recordkeeping costs and investment management fees. However, when performance is subpar, out-of-line expenses stick out like the proverbial sore thumb. Make sure you schedule regular, independent reviews of your plan expenses and fees every three to five years as part of your overall due diligence efforts.

Opaque Fee Structures
In the past, complex and opaque fee structures, such as revenue-sharing arrangements between asset managers and third-party administrators, made it difficult to get a handle on plan costs. But with the U.S. Department of Labor’s fee disclosure regulations now in its fourth year, pleading ignorance is no excuse. Mutual fund shares with built-in revenue-sharing features still exist; however, with required disclosure statements, it is easier for you (and plan participants) to understand what the expense charges are. Although these built-in revenue-sharing features are not inherently bad, they tend to be associated with funds that have higher expense charges. Also, in some plan fee litigation cases, courts have deemed fee-sharing arrangements as a payoff to an administrator to recommend those funds despite the funds’ performance (or lack thereof) in meeting the needs of the plan participants.

Bundled Services
Another expense-related red flag that could trigger litigation is exclusive use of a bundled plan provider’s investment funds. This also can raise questions about the effort that you put into investment performance evaluation.

So, if you use only a bundled provider’s funds, you could give the appearance of not performing your fiduciary duty to seek out the most appropriate and competitively priced funds. And, in fact, it is unlikely that one bundled provider has best-of-class funds in all of your desired investment strategy categories and asset classes. When retaining a bundled provider, question whether the recommendation of primarily proprietary funds could result in a conflict of interest if better performing and lower cost funds are available.

Share Classes
Even when your plan’s investment lineup features funds from multiple asset management companies, you could be inadvertently flying a red flag if the funds in your investment menu are in an expensive share class. Individual investors generally have access to only retail-priced share classes. In contrast, retirement plans (even small ones) typically can use more competitively priced institutional share classes. The failure to use institutionally priced share classes has been at the heart of many class action suits against plan sponsors.

Different share classes of the same mutual fund have different ticker symbols, which is an easy way to determine what is in the portfolio. Fund companies that offer shares with sales loads typically offer more variations, with “A,” “B” and “C” categories of retail shares, and an institutionally priced “I” share class without embedded sales charges.

Having some high-cost investments in your fund lineup is not in itself a reason that you will be deemed to have breached your fiduciary duties. There may be good reasons to include them, notwithstanding the higher costs.

Investment Policy Statements
The concept of “procedural prudence” is embedded in ERISA and case law. This means plan sponsors must establish and follow policies and procedures to safeguard participants’ interests and set the criteria used to evaluate vendors, including asset managers.

Create an investment policy statement to articulate your vision for plan investments overall and the investment options you want to make available to participants. The investment policy statement should clearly state:

  • What kind of assets will be included in investment options;
  • The degree of investment risk and volatility that is acceptable;
  • How the plan sponsor will assess investment performance; and
  • When the plan sponsor may change managers.

Although having an investment policy statement is not mandatory, having one in place and complying with its procedures can show that the plan sponsor is exercising procedural prudence. Following prudent procedures and policies will go a long way toward preventing missteps and avoiding potential litigation.

Next Steps
Avoiding ERISA litigation is on every plan sponsor’s wish list. Reviewing expenses, fee structures and bundled services, and creating and following an investment policy statement, can help you achieve this. As a fiduciary of the plan, we recommend you periodically review these areas on a consistent and regular basis, in good times and bad.

For more information, contact Jim Quaid at [email protected], or call him at 312.670.7444. Visit to learn more about our Employee Benefits Plan Services.

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