While there is no silverbullet to protect sponsors before and during litigation, followingbest practices is a start. (Photo: Shutterstock)

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Is there any end in sight to the torrent of litigation againstsponsors of retirement plans?

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Not likely, say attorneys at Mayer Brown, a firm that's defendedemployer sponsors at the district court and appellate levels insome of the country's largest ERISA claims.

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A rash of settlements in the past several years has motivatedwhat Nancy Ross, co-chair of Mayer Brown's ERISA litigationpractice, calls a “very aggressive” plaintiffs' bar.

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“Settlement drives the plaintiffs' interest,” said Ross in awebinar. “The motive is to get to discovery, and soon thereaftertry to broach the possibility of settlement.”

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In 2017, 30 cases settled for an aggregate of $529 million.Allegations of excessive investment management fees andrecordkeeping costs, imprudent revenue sharing and mutual fundshare class selection, and the inclusion—or lack of inclusion—ofstable value funds can be expected to continue into this year.

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But claims against insurance companies, money mangers, and banksusing their own proprietary funds in the defined contribution plansthey sponsor “are the darling of the plaintiffs' bar right now,”said Ross.

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The 20 class actions that have been filed against universitysponsors of 403(b) plans since 2017 have added a new wrinkle to thetrend of ERISA litigation. Four of those claims have beendismissed; the claim against New York University made it to a benchtrial, where the court ruled in favor of NYU.

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Attorneys for the firm also said there has been a recentresurgence in stock drop claims, prompted by a ruling in the SecondCircuit Court of Appeal that overturned a lower court decision in astock drop claim against IBM.

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While some sponsors have successfully had claims dismissed, theprecedent for dismissal across the circuits is “all over the map,”said Ross, a factor that is likely to encourage more claims goingforward. There have also been “creative attempts” by some judges toavoid precedent when ruling on dismissal, she said.

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If motions to dismiss are denied, sponsors are increasinglymotivated to settle claims: the ensuing discovery phase oflitigation is “expensive and distracting” for employers, saysRoss.

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While there is no silver bullet to protect sponsors before andduring litigation, the ongoing era of ERISA litigation hasfine-tuned the best practices sponsors can deploy to avoid anddefend against claims.

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Here is a list of 10 practices cited by the ERISA litigationteam at Mayer Brown.

1. Pick investment committees carefully.

Mayer Brown advises against including a company's generalcounsel as part of the investment committee that oversees a companydefined contribution plan.

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GCs advise company leadership on a range of issues, andconsequently could be perceived as being conflicted in advising onthe administration of a 401(k) plan.

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Adding legal counsel to an investment committee is, however,advisable. The attorneys recommend an in-house benefitsattorney.

2. Don't seat your CFO on investment committee.

Though it may seem logical, the attorneys also say it is bestnot to invite company chief financial officers to sit on investmentcommittees.

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A CFO is intertwined in all aspects of a company's performance,and her seat on an investment committee could also be perceived asbeing conflicted.

3. Choose a balanced investment committee.

Investment committees should be composed of a balanced mix ofthose with investment and financial acumen, and those with humanresource and benefits expertise.

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Equally important is for committees to maintain written,documented delegations of authority for all committee members, theattorneys say.

4. Use an investment policy statement.

Have an investment policy statement that identifies a retirementplan's mission, goals, and they type of investments it wants toprovide, the lawyers say.

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But if you have an ISP it's no help to not use it. “You have toadhere to it,” says Ross. “You can't just have it sitting on ashelf.”

5. Document detailed fiduciary process.

A plan's fiduciary process should be sufficiently documented.“As much detail as you can have will help if you are in a lawsuit,”says Ross.

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More investment committees are meeting quarterly. That may notbe necessary, says Ross, but it is advisable to meet more oftenthan annually.

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And committee members should be familiar with the language andterms in the plan.

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That may seem obvious, but Ross said depositions in some caseshave proven committee members' lack of basic familiarity with theplans in question.

6. Use RFPs for service providers, but not as frequently.

The plaintiffs' bar is emphatic that plan sponsors must userequest for proposals to assure a competitive biding process forselecting record keepers and other service providers to plans.

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The attorneys at Mayer Brown disagree with that principle —databases of provider costs can also be used to adequately vetfirms.

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RFPs can be “costly and distracting,” said Ross. Nevertheless,it is a good idea to issue an RFP, but not as frequently as theplaintiffs' bar claims.

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Ross says a sponsor can issue an RFP “less frequently” thanevery three to five years.

7. Fee transparency is crucial.

All plan costs must be clearly understood by fiduciaries toplans. Service providers must disclose their costs, but planfiduciaries should push back on providers if the fees are notclearly understood.

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Fiduciaries also need to understand service providers'arrangements with other vendors—for instance, if a recordkeeper isearning fees through third-party investment advisory services.

8. Diversify fund lineup.

There is no standard for the number of investments fiduciariesshould use when designing an investment menu, but 10 to 15 optionsis generally the “sweet spot,” says Ross.

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Fiduciaries need to diversify investment menus with a mix ofindex and actively managed funds. More commonly, fiduciaries areusing tiers of options—a core lineup, and brokerage window for moresophisticated investors among a participant population, and astable value fund for capital preservation.

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“You need to be very methodical in selecting investments,” saidRoss. Investment committees should consider bringing a plan'sinvestment advisor into the fold, as they bring a wealth ofknowledge as to how other sponsors are designing menus.

9. Benchmark fees and plan performance.

Benchmarking plans for its fees and its performance is critical,as is documenting the benchmarking.

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On share class selection, it is also necessary to document whyinstitutional or retail share classes were selected.

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If retail shares are selected to offset the cost ofrecordkeeping, that process and reasoning has to be documented.

10. Cap use of company stock.

Sponsors can offer company stock in an investment menu toincentivize productivity among workers. But overloading savings incompany stock can be a red flag.

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The attorneys recommend a cap on investment in company stock.Some plans have a 10 percent cap, others a 25 percent cap, theattorneys note.

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To completely neutralize the potential liability in offeringcompany stock, an independent fiduciary could be retained.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.