Recent Questions from Plan Sponsor Clients Re LaRue
I’ve read about this new 401(k) Supreme Court case—how far back can employees sue us if they claim we mishandled their accounts?.
Generally speaking, the statute of limitations for an ERISA claim grounded in breach of fiduciary duty is six years from the date of the last action that is alleged to be a breach or six years from the latest date the fiduciary could have cured a breach based upon an ommission. For plaintiffs who are found to have been on notice or have had actual knowledge of a breach, however, the statute of limitations runs three years from the date he/she discovered facts sufficient to put them on notice of the alleged breach. Claims grounded in fraud are also subject to the discovery rule, and the statute runs six years from the date of discovery. Depending upon the circumstances, claims can also be brought pursuant to applicable state laws where the limitations periods would vary from state to state and from claim to claim.
Anything we can do to protect ourselves going forward?
Assuming the same facts as LaRue, where the plaintiff was a participant in an employer-sponsored 401(k) plan, there are a number of steps one can take to mitigate and/or transfer the risk of being sued for investment losses in a participant’s account. Most claims arise from either investment-related activities or the lack of prudent administrative processes and procedures. While many of the investment-related functions can be effectively delegated to third parties, the plan sponsor remains liable for the prudent selection and monitoring of service providers. It is, therefore, imperative that such decisions are documented and the factors considered are detailed in written minutes.
For example, in many of the recently-filed cases alleging excessive fees, the plaintiffs allege that the respective plan fiduciaries failed to adequately investigate fee arrangements and alternatives. Given that ERISA does not require that the plan negotiate the lowest cost arrangement, documents evidencing negotiations between the plan and its service providers would generally suffice to demonstrate that the arrangement at issue was prudently selected. The plan sponsor should also continuously monitor these arrangements to identify “hidden fees” and determine whether they are reasonable in light of the services provided. Again, the process for selecting and monitoring service providers and their respective fees should be documented and reported periodically.
The Department of Labor (DoL) has produced two guides for fiduciaries to better understand their obligations with respect to fees charged by service providers. The guides are available through the DoL’s website at:
www.dol.gov/ebsa/pdf/401kfefm.pdf
www.dol.gov/ebse/publications/fiduciaryresponsibility.html
As discussed, plan sponsors can delegate investment-related decisions to professionals, and the plan remains liable only for the prudent selection and monitoring of those individuals. An investment advisor can be engaged to select the investments that are offered to participants and to monitor the performance of those investments, and ERISA provides for the appointment of an investment manager to actively manage plan assets with discretion.
The Pension Protection Act also provides two safe harbors by which plan sponsors can insulate themselves from investment-related claims brought by plan participants: the Qualified Default Investment Alternative (“QDIA”); and fiduciary advisers. The QDIA safe harbor serves to protect plan sponsors from liability associated with the allocation of a participant’s account to a more diversified investment option when the participant fails to provide any investment directions. We recommend engaging an investment adviser to help with the selection of a suitable QDIA. The fiduciary adviser safe harbor insulates plan sponsors from liability for investment losses in a participant’s account where a fiduciary adviser is retained to provide specific investment recommendations pursuant to an eligible investment advice arrangement between the plan sponsor and the investment adviser. A comprehensive collection resources to assist plan sponsors with these safe harbors can be found at www.ppa-law.com.
Anything we can do to protect ourselves relating to any claims that might already be out there?
To the extent you suspect that a breach may have occurred, we recommend undertaking a comprehensive risk assessment that examines the plan as a whole. A risk assessment program looks for procedural prudence as it relates to investments and administrative functions and operates to detect fiduciary breaches before they result in claims. Because fiduciary exposure often begins with participant complaints either in the form of phone calls or letters from participants claiming benefits, we also recommend retaining experienced counsel to assist with drafting responses to such inquiries and to document the issues that relate to a denial of benefits. Courts do not review fiduciary decisions with 20/20 hindsight, so the proper response and documentation will go a long way in establishing that the plan sponsor’s actions were prudent and appropriate at the time they occurred.
Generally speaking, the statute of limitations for an ERISA claim grounded in breach of fiduciary duty is six years from the date of the last action that is alleged to be a breach or six years from the latest date the fiduciary could have cured a breach based upon an ommission. For plaintiffs who are found to have been on notice or have had actual knowledge of a breach, however, the statute of limitations runs three years from the date he/she discovered facts sufficient to put them on notice of the alleged breach. Claims grounded in fraud are also subject to the discovery rule, and the statute runs six years from the date of discovery. Depending upon the circumstances, claims can also be brought pursuant to applicable state laws where the limitations periods would vary from state to state and from claim to claim.
Anything we can do to protect ourselves going forward?
Assuming the same facts as LaRue, where the plaintiff was a participant in an employer-sponsored 401(k) plan, there are a number of steps one can take to mitigate and/or transfer the risk of being sued for investment losses in a participant’s account. Most claims arise from either investment-related activities or the lack of prudent administrative processes and procedures. While many of the investment-related functions can be effectively delegated to third parties, the plan sponsor remains liable for the prudent selection and monitoring of service providers. It is, therefore, imperative that such decisions are documented and the factors considered are detailed in written minutes.
For example, in many of the recently-filed cases alleging excessive fees, the plaintiffs allege that the respective plan fiduciaries failed to adequately investigate fee arrangements and alternatives. Given that ERISA does not require that the plan negotiate the lowest cost arrangement, documents evidencing negotiations between the plan and its service providers would generally suffice to demonstrate that the arrangement at issue was prudently selected. The plan sponsor should also continuously monitor these arrangements to identify “hidden fees” and determine whether they are reasonable in light of the services provided. Again, the process for selecting and monitoring service providers and their respective fees should be documented and reported periodically.
The Department of Labor (DoL) has produced two guides for fiduciaries to better understand their obligations with respect to fees charged by service providers. The guides are available through the DoL’s website at:
www.dol.gov/ebsa/pdf/401kfefm.pdf
www.dol.gov/ebse/publications/fiduciaryresponsibility.html
As discussed, plan sponsors can delegate investment-related decisions to professionals, and the plan remains liable only for the prudent selection and monitoring of those individuals. An investment advisor can be engaged to select the investments that are offered to participants and to monitor the performance of those investments, and ERISA provides for the appointment of an investment manager to actively manage plan assets with discretion.
The Pension Protection Act also provides two safe harbors by which plan sponsors can insulate themselves from investment-related claims brought by plan participants: the Qualified Default Investment Alternative (“QDIA”); and fiduciary advisers. The QDIA safe harbor serves to protect plan sponsors from liability associated with the allocation of a participant’s account to a more diversified investment option when the participant fails to provide any investment directions. We recommend engaging an investment adviser to help with the selection of a suitable QDIA. The fiduciary adviser safe harbor insulates plan sponsors from liability for investment losses in a participant’s account where a fiduciary adviser is retained to provide specific investment recommendations pursuant to an eligible investment advice arrangement between the plan sponsor and the investment adviser. A comprehensive collection resources to assist plan sponsors with these safe harbors can be found at www.ppa-law.com.
Anything we can do to protect ourselves relating to any claims that might already be out there?
To the extent you suspect that a breach may have occurred, we recommend undertaking a comprehensive risk assessment that examines the plan as a whole. A risk assessment program looks for procedural prudence as it relates to investments and administrative functions and operates to detect fiduciary breaches before they result in claims. Because fiduciary exposure often begins with participant complaints either in the form of phone calls or letters from participants claiming benefits, we also recommend retaining experienced counsel to assist with drafting responses to such inquiries and to document the issues that relate to a denial of benefits. Courts do not review fiduciary decisions with 20/20 hindsight, so the proper response and documentation will go a long way in establishing that the plan sponsor’s actions were prudent and appropriate at the time they occurred.
posted by Jason C. Roberts, Esq. at
11:24 AM
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