It’s not a secret that plan sponsors of 401(k) and 403(b) retirement plans are being sued. There are stories of large judgments and settlements. The current crop of cases began with Enron in the early 2000s. The lawsuit against Enron, and the plan committee members and board of directors, settled for $85 million—a headline grabbing amount.

However, not all cases are lost or settled. Plan sponsors win some of the cases; unfortunately, though, there is little, if any, publicity about those cases and about why the plan sponsors won. This article discusses one of those cases, Sacerdote v. New York University, why the judge ruled in favor of NYU, and the lessons that plan sponsors can learn from that case.

NYU sponsored two 403(b) plans. It was sued for the same reasons as come up in most of the 401(k) and 403(b) cases . . . poor quality investments, paying too much money for the investments, and paying too much for the administrative, or “recordkeeping”, services for the plans. The court’s opinion focused, as the law requires, on the processes used by the plan fiduciaries—the members of the committees that oversaw the plans—in making decisions about the quality of the investments and the costs of the investments and services. While the outcome was favorable, some of the committee members were dragged over the coals by the judge. Fortunately, though, the conduct of other committee members saved the day for NYU.

The “Concerning” Committee Members

Let’s start with the court’s concerns about some of the committee members. The court had this to say about one of the co-chairs of the plan committee:

“[Her] testimony was concerning. She made it clear that she viewed her role as primarily concerned with scheduling, paper movement, and logistics; she displayed a surprising lack of in-depth knowledge concerning the financial aspects of managing a multi-billion-dollar pension portfolio and a lack of true appreciation for the significance of her role as a fiduciary. In a number of instances, she appeared to believe that is was sufficient for her to have relied rather blindly on [the plan investment consultant’s] expertise. As a matter of law, blind reliance is inappropriate. . . . For instance, she testified that it was entirely appropriate for her, as well as the other Committee members, to rely upon [the investment consultant] to determine the reasonableness of fees and that she did not do anything to test the reliability of their information…. She bluntly testified that ‘[i]t’s not my job to determine whether the fees are appropriate’ for the Plans.”

The court also found that the testimony of another Committee member was disturbing. The judge said that she “was similarly unfamiliar with the basic concepts relating to the Plans, such as who fulfilled the role of administrator for the Faculty Plan. . . . When asked about her inability to remember Plan details, [she] responded that she has a ‘big job’ (referring to her human resources role, not her Committee membership) and that her role on the Committee is one of many responsibilities she has….This suggested that [she] does not view herself as having adequate time to serve effectively on the Committee.”

After those negative comments, it’s fair to ask how the court could have decided in favor of the committee. After all, the committee members are the primary fiduciaries for overseeing the plans’ investments and service providers. The answer is that the conduct of other committee members more than offset the disturbing lack of knowledge and interest of the other two.

The “Complying” Committee Members

For example, the judge said that:

“In contrast, NYU’s Chief Investment Officer (‘CIO’) and a Committee member from 2010-2014, ‘questioned [the investment consultant’s] recommendations all the time.’… [She] appeared to be very knowledgeable in the area of investing generally. She attended a majority of Committee meetings held between 2010-2014. [She] testified that she remembers ‘speaking up a lot beyond what’s contained in the minutes…many more times than two times over the course of [her] tenure….’ As the CIO, [she] saw her role as providing ‘specialized knowledge relating to investing’ to the Committee…. She testified that she ‘questioned [the investment consultants] and discussed...the basis for their views’ on the Plan’s investment options…. Outside Committee meetings, [she] read plan materials…and also met with [investment consultant] team members to discuss general market trends and investment options as well as specifics around NYU’s IPS.”

Based on the competency and attentiveness of some of the committee members, the court found that the committee had acted prudently. To quote:

“While the Court finds the level of involvement and seriousness with which several Committee members treated their fiduciary duty troubling, it does not find that this rose to a level of failure to fulfill fiduciary obligations. Between [the investment consultant’s] advice and the guidance of the more well-equipped Committee members…, the Court is persuaded that the Committee performed its role adequately.”

Lessons Learned: Factors That Supported the Committee’s Fiduciary Conduct

Here are factors that warranted a decision in favor of the committee:

  • The committee engaged an independent investment consultant with experience and expertise in working with plans of a similar type and size.
  • Some committee members closely reviewed the consultant’s reports and questioned the consultant in order to fully understand the recommendations and the reasons for them. As a result, those members were able to reach informed, reasoned decisions about whether to accept the consultant’s recommendations.
  • The committee adopted an investment policy statement and followed its terms.
  • The committee members met regularly to review reports and consider the recommendations of the investment consultant.
  • The committee members periodically reviewed and benchmarked the recordkeeping services and fees, and acted on those reviews, for example, over the years the committee negotiated for reductions in recordkeeping fees.
  • The committee regularly reviewed the expenses of the investments and considered the investment consultant’s reports on investment expenses.
  • With regard to claims that the plan held investment options that were underperforming, the committee reviewed the investments, met with the consultant, and made thoughtful decisions to keep them in the plan.

Concluding Thoughts

While fiduciary responsibility for retirement plans may seem daunting, the court decisions favoring plan sponsors define a pathway to compliance. However, most employers aren’t aware of these cases or of the pathway. In that case, the best starting point could be to engage an experienced retirement plan consultant or advisor. The knowledge and experience of the consultant can provide invaluable help to plan sponsors and committees. The next step is to develop a structure for committee meetings and decision-making. A common arrangement is to have regular meetings that include reports and advice from the consultant. And, as the NYU decision indicates, it is imperative that the committee members review the reports from the consultant (and the other service providers), ask questions and make informed decisions.

This content was authored by Fred Reish. Fred Reish is a partner with the law firm of Faegre Drinker who specializes in retirement law, focusing on fiduciary and best interest standards of care, prohibited transactions, conflicts of interest, and retirement plans.

The views expressed in this article are those of Fred Reish, and not necessarily of Faegre Drinker or HUB International. The article is for general information only and is not intended to provide investment, tax or legal advice, or recommendations for any particular situation. Please consult with a financial, tax or legal advisor on your circumstances.

HUB International’s retirement plan fiduciary advisors provide ongoing guidance on your plan’s setup and management to ensure it meets regulatory compliance guidelines and the interests of your employees. Contact HUB to request an assessment of your organization’s retirement plan.