As a 401(k) plan sponsor or fiduciary, how do you best prepare to ward off lawsuits? In this episode, Todd Zempel, Partner and Director of Retirement Plan Services for Gordon Asset Management, LLC , will equip you with the knowledge to handle these challenges. From the implications of these lawsuits to the robust solutions available, we're bringing you an enlightening conversation that's essential for every business owner or management team overseeing company retirement plans. Tune in, stay informed, and protect your business.
As a 401(k) plan sponsor or fiduciary, how do you best prepare to ward off lawsuits? In this episode, Todd Zempel, Partner and Director of Retirement Plan Services for Gordon Asset Management, LLC , will equip you with the knowledge to handle these challenges. From the implications of these lawsuits to the robust solutions available, we're bringing you an enlightening conversation that's essential for every business owner or management team overseeing company retirement plans. Tune in, stay informed, and protect your business.
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Todd Zempel:Welcome to the podcast. This is Todd Zempel, partner and director of Retirement Plan Services for Gordon Asset Management. Today is November 17, 2023. We're here today to talk about the surge in excessive fee lawsuits targeted towards company-sponsored retirement plans. If you are a business owner or part of a management team that oversees your company's retirement plan, this is extremely important information. But today we're not just talking about the challenges. We're here to discuss solutions and how robust governance and meticulous documentation can be your best defense.
Todd Zempel:Excessive fee lawsuits in 401k plans are on the rise and have become a prominent trend in ERISA fiduciary litigation. For plan sponsors, understanding the legal landscape and the best practices and governance is crucial in effectively managing these challenges. In recent cases, there are some key insights that can be gained. One important defense that has proven effective is the concept of a prudent process. In the case of Nunez versus Braun Medical, the plan participants alleged that the fiduciary committee failed to select low-cost investment alternatives and monitor record-keeping expenses, resulting in excessive fees. However, the court ruled in favor of the plan sponsor, emphasizing the committee's consistent and reasonable actions in managing plan fees. These actions included regular meetings, engaging financial advisors, maintaining an investment policy statement, using a watch list for underperforming funds and monitoring share classes and record keeping fees. This case highlights the importance of adhering to a prudent process in line with industry practices. Another notable trend is the increase in excessive fee lawsuits targeted towards smaller plans. In 2022, 40% of these lawsuits were filed against plans with less than $1 billion in assets and 20% against plans with less than $500 million. This shift indicates that any plan, regardless of its size, can be a target for litigation. Once faced with an excessive fee lawsuit, the costs can be substantial. Historically, the success rate of defendants at the motion to dismiss stage has been low and remains inconsistent In most settlements. In 2022, the range was between $500,000 and $4 million, with one reaching as high as $32.5 million.
Todd Zempel:To effectively manage these challenges, there are several best practices that plan sponsors and fiduciaries should consider implementing. First and foremost, fiduciaries have a duty of prudence. This means carefully selecting and monitoring service providers and ensuring that the fees being paid are reasonable for the services provided. It's important to note that reasonable fees do not necessarily mean the lowest prices, but rather ensuring that the fees reflect the services size and needs of the plan, as well as the investment options offered For our clients. At least annually, we not only account for all plan fees, but also benchmark them against a peer group of similar size plans. We feel this is a best practice. Periodically bidding out services may also be prudent, but the process can often be time and labor intensive.
Todd Zempel:Documenting the fiduciary governance process is crucial to establishing good plan governance and can be pivotal in defending against claims of fiduciary breach. This includes keeping meeting minutes, committee procedures and investment policy statements up to date. The fiduciary process should be customized to the plan, taking into account its size, participant needs and plan sponsor resources. Essential components of this customized process include forming a plan committee, holding regular meetings and documented investment monitoring. Plan fiduciaries and committee members should also have a solid understanding of ERISA rules and their responsibilities. Regular updates and training on changes in the law and industry trends are advisable. It may also be helpful to seek the expertise of consultants, legal counsel or investment advisors to support the fiduciary process.
Todd Zempel:One popular way to help immunize your plan from poor investment decisions is to hire a fiduciary advisor. Advisors can generally serve the plan in one of two ways One as an ERISA 338 investment manager or two as an ERISA 321 investment advisor. A 338 is an investment manager and, by definition, is a fiduciary because they take discretion authority and control of the plan's assets. A 321 advisor does not take discretion or control over the assets, but rather makes recommendations to the plan's sponsor, who then decides to implement those recommendations or not. Erisa 316 is another popular option. Erisa 316 describes a named fiduciary that has the authority to control and manage the operation and administration of the plan.
Todd Zempel:A 316 fiduciary is often a third-party administrator that takes on crucial administrative responsibilities. This includes ensuring the plan's compliance with ERISA regulations, interpreting plan documents and often making decisions about the plan's operation. The key here is that a 316 fiduciary shoulders the responsibility and liability for these administrative tasks. Although that sounds fantastic, the devil is in the details. Oftentimes, 316 arrangements are footnoted with language that puts the liability back on the plan's sponsor for bad data or anything out of the norm. Great marketing, absolutely Actual help Maybe, but it depends on the details of the agreement. By staying informed and adhering to a diligent and documented fiduciary process, plan sponsors and fiduciaries can position themselves to effectively ward off potential lawsuits. This not only safeguards the interests of plan participants, but also helps to insulate the plan's sponsor and fiduciaries from potential liability and costly legal expenses. If you have questions or if you'd like to learn more about how we can help you implement strategies to help reduce your potential liability, please reach out to us at wealthqbcom.
Outro:Opinions expressed are those of the podcast guests and don't necessarily reflect those of Gordon Asset Management LLC, its producers, hosts or guests. Information presented should not be construed as tax, legal or investment advice or a recommendation or solicitation for the sale of any product or strategy. Investors are encouraged to seek advice from qualified professionals to determine whether any information presented may be suitable for their specific situation. Investments involve risks. Neither Gordon Asset Management LLC nor its podcast participants shall be liable for losses resulting from decisions based on information or viewpoints presented on this podcast.