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New White Paper Reveals 3 Greatest Fiduciary Liability Threats to 401k Plan Sponsors

August 23
23:16 2010

The Chubb Group of Insurance Companies and Morgan, Lewis & Bockius LLP recently released a special report on the risk of fiduciary liability lawsuits that may just scare the you-know-what out of the average 401k plan sponsor. In a press 1262385_51508072_Danger_Sign_stock_xchng_royalty_free_300release dated August 12th, Chubb states “The U.S. Labor Department reported 910 corrected violations resulting from the 1,042 investigations of violations of the Employee Retirement Income Security Act (ERISA) it conducted in 2009.” That’s roughly 4.5 correct violations for every business day of the year. And who said regulators have been sitting on their hind ends?

Making matters worse, the current economic setting only heightens fiduciary liability. “Business owners and managers need to understand the fiduciary liability exposures they face, especially in an environment where they are likely to reduce staff or employee benefits,” said Christine Dart, vice president and manager for worldwide fiduciary liability at Chubb. “Employees who still have jobs may not be inclined to ‘rock the boat,’ but those who find themselves overboard are more likely to take legal action against employers, especially if their 401k plans sustained losses before they were terminated.”

Charles Jackson, a labor and employment partner and co-chair of the ERISA Litigation Practice at Morgan, Lewis & Bockius LLP warns “The U.S. Supreme Court’s ruling in LaRue v. DeWolff and regulatory changes have helped empower individual plan participants to bring actions for losses to their own accounts, paving the way for other claims against the fiduciaries.”

Below we summarize the three most significant litigation threats to 401k plan sponsors revealed in the report (portions of this summary are extracted directly from the report):

  1. “Stock drop” cases that allege plan fiduciaries acted imprudently in offering an employer stock fund or misrepresented the risks associated with investments in a plan sponsor’s stock – With more than 200 such cases filed in the past decade, it’s easy to understand why these legal actions represent a large percentage of class action filings under ERISA. First, the market itself has been volatile and unpredictable. Second, a number of high profile ERISA class action attorneys actively solicit these kinds of claims from retirement plan participants.
  2. “Fees and expense” cases alleging the plan fiduciaries breached their obligations to the plan and its participants by charging or permitting excessive fees and expenses for plan services provided by third parties, such as investment management, recordkeeping, and custodians – These fees claims come in three basic forms. The most common form is suits filed by class counsel directly against employers, their officers and directors, and sometimes service providers, contending that 401k plan fiduciaries were “asleep at the switch” in allowing plan service providers to be paid excessive amounts for their services and in failing to inform participants of the intricacies of compensation arrangements. A second type of claim (actually a subset of the first) is the “proprietary fund” case. Proprietary fund lawsuits allege plan fiduciaries improperly bought, on behalf of the plan investment, products of affiliated entities of plan service providers. A third category of claims is “gatekeeper” cases, which have been brought as national class actions by fiduciaries of small to midsize plans against bundled service providers such as insurance carriers, alleging that improper revenue-sharing agreements provided unlawful “kickback” payments to the carriers, based on the percentage of plan assets invested in a particular fund.
  3. Investment imprudence cases alleging that plan fiduciaries breached their duties to invest plan assets prudently, breached their duty of loyalty, had conflicts of interest, and/or engaged in prohibited transactions – The report suggests including a Section 404(c) provision and hiring an outside fiduciary may relieve the fiduciaries from liability for damages for “any loss or any breach” where participants exercise control over assets allocated to their accounts.

Author Kerry Pechter was kind enough to share his story on this subject with Fiduciary News last week. For a list of five recommendations from the Chubb report, we encourage you to read his Retirement Income Journal story “How to Reduce the Threat of Fiduciary Liability Lawsuits,” (August 18, 2010).

Here’s the direct link to the full report “Who May Sue You and Why: How to Reduce Your ERISA Risks and the Role of Fiduciary Liability Insurance,” as provided by the Chubb press release: http://www.chubb.com/businesses/csi/chubb12107.pdf.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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