PLANADVISER - March/April 2020 - 39

compliance consult
David Kaleda
On Small Plans and Large
Any size plan could be a target for fee litigation
C
lasses of participants in self-directed defined contribution
(DC) retirement plans subject to the fiduciary
duty provisions of the Employee Retirement Income
Security Act (ERISA) have, for over 15 years, been suing
their plan fiduciaries and service providers for breach of
those duties. The focus of the allegations has been that the
participants' plan investments are too expensive and that
the plan pays too much for recordkeeping fees.
Participants tended to file these suits against fiduciaries
of plans with at least $1 billion of assets under management
(AUM). However, during the past few months, we've seen a
trend in class action lawsuits brought against smaller plans.
These cases should remind plan fiduciaries and their advisers
that ERISA applies to all plans, regardless of size, and that
there are steps a fiduciary can take to mitigate fiduciary risk.
In Buescher v. Brenntag North America, Inc., which was filed
this January 8 in the Eastern District of Pennsylvania, the
participants of a plan with approximately $440 million
in assets brought breach of fiduciary duty claims against
the sponsor and named fiduciaries. The claims were the
same as those found in suits brought against larger plans.
For example, the participants alleged the plan could have
substantially saved on investment fees by investing in
collective trusts and separate accounts in lieu of mutual
funds. Additionally, they alleged that the defendants failed
to make lower-cost mutual fund share classes available.
The participants also alleged that plan fiduciaries failed to
prudently manage the plan's recordkeeping costs.
In four other cases filed since last November, participants
brought ERISA breach of fiduciary duty suits against
plans with $335 million in assets, $300 million in assets,
$180 million in assets and $52 million in assets. The plaintiffs
alleged breach of ERISA fiduciary duty claims similar
to those found in the Brenntag case. Further, in Savage v.
Sutherland Global Services, Inc., the plaintiffs claimed that
the fiduciaries of another $52 million plan failed to offer a
prudent mix of investments.
These cases highlight that some law firms appear to be
increasingly willing to represent participants in plans that
are smaller than the mega plans. The firms involved with
these suits tend not to be the those filing suits against mega
plans, which suggests new entrants into the ERISA class
action 401(k) fee litigation business.
The recent litigation activity highlights the fact that
ERISA applies equally to plans of all sizes. Therefore, fiduciaries
to smaller plans should consider what actions they may
Plaintiffs claimed that the fiduciaries
of another $52 million
plan failed to offer a prudent
mix of investments.
take to mitigate the risk that a court will find they violated
their fiduciary duties. Such fiduciaries must make an effort
to understand how much their plan, directly and indirectly,
pays for investment, recordkeeping and other services.
The manner in which plan service providers are compensated
can be complicated, but it is incumbent on plan fiduciaries
to gain an understanding of such arrangements, no
matter the size of the plan, so they may make decisions as
prudent experts and solely in the interest of the participants.
They also have an obligation to determine that compensation
paid to operate the plan is reasonable. This requires periodic
fee studies and, possibly, competitive bidding processes-e.g.,
requests for proposals (RFPs)-for certain plan services.
To establish their compliance with ERISA, plan fiduciaries
should, among other things: 1) identify who should be
responsible for making fiduciary decisions under the plan;
2) confirm that fiduciaries have the appropriate expertise
to determine whether the decisions they make are prudent
and in the best interest of participants; 3) receive appropriate
training so they understand their fiduciary obligations
under ERISA and the extent of their liability; 4) hire
experts such as an investment adviser to aid them in making
fiduciary decisions in accordance with a prudent expert
standard; 5) meet regularly; 6) clearly document fiduciary
decisions and the decisionmaking process; and 7) consider
whether they are adequately protected by company indemnification
provisions and fiduciary liability insurance.
Under ERISA, if they don't take such measures, plan fiduciaries
are vulnerable to personal liability. Advisers would do
well to remind their clients of their fiduciary duties and how
they can comply with ERISA.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C. He has
an extensive background in the financial services sector. His range of
experience includes handling fiduciary matters affecting investment
managers, advisers,
providers.
broker/dealers,
insurers, banks and service
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PLANADVISER - March/April 2020

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