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How Can I Reduce My Risk Of Being Sued? Actions For Plan Fiduciaries That Can Reduce The Risk Of An ERISA Lawsuit With Respect To Plan Investments

Employee Benefits Law Update J. Paul Jacobson, Robert D. Rothacker, David P. Olson, Amy A. Ciepluch, Sarah M. Linsley, Marla B. Anderson

The past year was difficult for all types of retirement plans. Employees participating in 401(k) plans were dismayed to see their account balances dip by as much as half, and many employers will have to make increased contributions to defined benefit plans to make up for 2008's investment losses. Plan fiduciaries, such as plan sponsors, have filed lawsuits against other plan fiduciaries, such as investment advisors, in an effort to recoup some plan losses. Additionally, the number of ERISA class action lawsuits filed by plan participants has increased, and this trend is expected to continue in 2009.

Plan fiduciaries are often most affected by ERISA class action lawsuits because they face personal liability for breaches of their fiduciary duties. Given the current economic conditions, it is even more important for plan fiduciaries to take actions now to protect themselves, their companies and their plans from an ERISA lawsuit. Here are actions you can take now to reduce the risk of ERISA litigation:

Thoroughly analyze and disclose investment fees.

Many of the ERISA class action lawsuits in recent years have focused on investment fees, particularly those that were "hidden" from participants. Proposed regulations under ERISA sections 404(a) and 404(c) offered some guidance as to the amount of disclosure that should be provided to plan participants. However, those regulations were not finalized, and industry analysts generally predict that fee disclosure requirements will be enhanced under the Obama administration. While there is no final guidance yet available, plan sponsors can still act to make sure that investment fees are adequately disclosed to participants in summary plan descriptions and account statements.

However, full disclosure of investment fees will likely do little to prevent an ERISA lawsuit if the fees charged are unreasonable. Plan fiduciaries should know the total amount of fees that plan participants are paying and establish appropriate benchmarks and comparisons for investment fees. Investment advisors can generally provide the average investment fee for a particular asset class to guide plan fiduciaries in determining whether investment fees are reasonable.

Monitor and examine the investment returns of all funds, including lifecycle funds.

Investment committees should review the performance of the funds in the plan and compare the investment returns to other funds in the same asset class and the appropriate market index. While most funds are likely to have a loss for 2008, investment committees should consider whether the extent of the loss is greater than that for other funds in that asset class or for the appropriate index.

Don't assume there is less obligation to monitor fund performance for lifecycle or target date funds. Recent research by Morningstar found that returns for a fund with a target retirement date of 2010 varied from less than -3.5% to more than -41%. This research shows that investment committees should review the composition and holdings of their lifecycle funds, too.

Be cautious when offering employer stock as an investment option.

The last significant stock market decline brought about a rash of "employer stock drop" cases, alleging the investment in employer stock was imprudent or employees were not provided adequate disclosure. All indications are that these types of claims will increase in conjunction with the current stock market decline. Based on these cases, many fiduciaries have eliminated employer stock as an investment option in their plans or increased participants' ability to diversify their employer stock holdings. Seek advice on the risks of continuing to hold employer stock in plans and the actions you can take to mitigate those risks.

Retain an outside investment advisor.

If the individuals responsible for making investment decisions with respect to the plan are not or do not feel qualified to solely monitor the investment funds under a plan, consider retaining an independent, outside investment advisor. These advisors can monitor the performance of the investment funds under the plan and make recommendations to the fiduciaries with respect to whether such funds should be retained, put on a watch list or replaced.

This is the second in a series of updates that Quarles & Brady will be providing on how plan fiduciaries can reduce the risk of an ERISA lawsuit. We also will be hosting "Fiduciary University," a seminar on how to minimize your risk of fiduciary liability, on May 19, 2009.

In the meantime, if you have any questions about minimizing your risk, you may contact, Paul Jacobson at 414-277-5631 / paul.jacobson@quarles.com, Robert Rothacker at 414-277-5643 / robert.rothacker@quarles.com, David Olson at 414-277-5671 / david.olson@quarles.com, Amy Ciepluch at 414-277-5585 / amy.ciepluch@quarles.com, Sarah Linsley at 312-715-5075 / sarah.linsley@quarles.com, Kerri Hutchison at 414-277-5287 / kerri.hutchison@quarles.com, Marla Anderson at 414-277-5453 / marla.anderson@quarles.com or your Quarles & Brady attorney.