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Supreme Court Makes It Harder for Employers to Dodge 401(k) and 403(b) Lawsuits

Under ERISA, employers that sponsor a 401(k) plan or 403(b) plan have a fiduciary duty to act prudently in managing plan investments. That means making sure investment options offered to employees and plan recordkeepers don’t charge excessive fees. 

More than 150 class-action lawsuits alleging excessive fees have been filed in the past few years, and thanks to a recent U.S. Supreme Court decision, defending such lawsuits just got harder.

In Hughes v. Northwestern University, the Supreme Court ruled that it wasn’t enough that Northwestern’s 403(b) plans offered some investment options without excessive fees. Rather, the Court ruled that the offering of other investment options with excessive fees could be a breach of fiduciary duty.

An employer sponsoring a 401(k) plan or 403(b) plan has “a duty to monitor all plan investments and remove any imprudent ones.” The Court rejected any “categorical rule” that plan fiduciaries are insulated from lawsuits if at least some of the investment options are prudent. 

Rather, the Court ruled that ERISA requires a “context-specific inquiry” to ensure that plans are meeting their fiduciary obligations to remove imprudent investment options from the menus of available options.

Most of the class-action litigation to date have involved plans with $500 million or more in assets. But the size of plans involved in lawsuits has been getting smaller, and the Supreme Court's decision is likely to continue that trend. Recently, plans with assets of less than $100 million have been involved in lawsuits.

What Should an Employer Do to Reduce its Risk of Getting Sued over its 401(k) Plan or 403(b) Plan? 

First, the plan should be governed according to established procedures. An administrative committee should be charged with overseeing the plan and ensuring that its investment options are appropriate and fees aren’t excessive.

Second, minutes should be kept of all committee meetings showing that the committee regularly reviewed the investment options to ensure the fees charged are appropriate for the plan's size and specific investment types. The committee should follow the advice of a registered investment advisor when reviewing the investment options.

Bottom line: Don’t wait until your company is named in an ERISA breach of fiduciary duty lawsuit involving your 401(k) plan or 403(b) plan. We have a lot of experience helping clients position themselves to defend against those kinds of lawsuits. Make sure your house is in order before a plaintiff’s attorney knocks on your door.

If you have any questions, please contact Theodore P. Stein.

 

Theodore P. Stein
410-576-4229 • tstein@gfrlaw.com