From the 1990’s forward, litigation against 401(k) plan sponsors has tripled; now surpassing litigation brought against medical professionals. Stop for a moment and think about what that statement means: companies that offer a 401(k) plan are getting sued more often than Doctors, nurses and the staff who assist them. No doubt, you are familiar with or have heard of someone you know that has brought litigation against a medical professional for malpractice – a relatively common occurrence. Yet, what you may not have realized is that there are more law suits brought against plan sponsors of 401(k) plans than against medical professionals.
You may recognize some of the entities that have had litigation brought against them – here is a brief sampling of those who have tasted of this litigation:
Caterpillar, General Dynamics, Lockheed Martin Corp., International Paper Co., Bechtel Corp., Boeing Co., Kraft Foods Inc., CIGNA Corp., Ameriprise Financial, Mass Mutual, Novant Health and the list goes on. In this small sample alone, just the plaintiff attorney’s fees are more than $111,000,000. The cost to defend, damages awarded, penalties, fines and time are all in addition to the dollar amount granted to the plaintiff attorneys.
So, what on earth are companies that sponsor 401(k) plans doing that has caused people to hire lawyers to sue the very company that is offering them a retirement benefit? The vast majority of the lawsuits brought against 401(k) plan sponsors have to do with two themes: expensive investment options and sub-par investment returns – it is easy to see the correlation between the two themes. It is also easy to understand why attorneys are anxious to bring litigation against 401(k) plan sponsors who are in a vulnerable position with respect to their handling of the investment options in their plans – among other things, it pays well. Note that it only takes one participant in the 401(k) pool of the company to initiate a class action lawsuit.
How do you as a plan sponsor protect yourself from getting your hand bit while providing a wonderful retirement benefit for your employees? The Employee Retirement Income Security Act of 1974 (ERISA) allows plan sponsors to delegate investment responsibility and certain liability to an investment fiduciary, known as a 3(38)-investment fiduciary. A 3(38)-investment fiduciary accepts investment authority and responsibility for the plan as well as the liability associated with its investment decisions relative to the plan.
Plan sponsors are busy enough with the opportunities associated with managing and growing their businesses. Just as a CEO hires other experts to help her in managing the business, it makes sense to hire experts to manage the investment process of the 401(k) plan. Don’t you think it makes even more sense to hire professionals whose interests are explicitly aligned, through written contract, with the plan sponsor’s interests and who bear full fiduciary responsibility and liability for their actions? We do too – that is why we serve as a 3(38)-investment fiduciary to our client’s 401(k) plans. None of the companies listed above thought they would ever end up paying millions of dollars because of a breach in their 401(k) plans – you probably feel the same way. Perhaps it’s worth a few minutes to find out if you should be worried about your 401(k)-fiduciary risk – give us a call, we can help.
 Srinivas D. Reddy, CFA, Douglas S. McIntosh “The Value of Fiduciary Protection What plan sponsors need to know” Prudential
 Bloomberg BNA review of docket files