Managing Fiduciary Risk: 6 Things Retirement Plan Committees Need to Know

Defending a lawsuit can be expensive and exhausting. It’s even worse when a plan sponsor is trying to do the right thing for its employees by providing a retirement plan, such as a 401(k) plan, and is sued for the investments or expenses in the plan. But it doesn’t need to be that way. Plan sponsors can learn from the lawsuits filed against other companies, both the wins and the losses, and manage their plans in a way that minimizes the risk of being sued or, if sued, of losing the case.

This article discusses practices that support compliance with the requirement to properly manage a retirement plan.

For context, a company that sponsors a retirement plan is a “fiduciary” under a law known as “ERISA”—the Employee Retirement Income Security Act. Typically, a company with at retirement plan appoints an officer or a committee to make decisions about the plan’s operations. That person or those people are fiduciaries, subject to the legal requirements to act prudently and with loyalty to the participating employees. This article uses “plan committee” to refer to those fiduciaries. Also, for ease of reading, the article uses “401(k) plans” to refer to employer-sponsored retirement plans, since that is the most popular type of retirement plan.

A review of many of the recent 401(k) lawsuits reveals the following steps as being critical to avoiding a successful claim of fiduciary breach; however, not all of these steps are required by ERISA. Instead, this is primarily a list of “best practices” to avoid being a target for plaintiffs’ attorneys and, if a claim is filed, for showing that the company equaled or exceeded the legal requirements.

• Plan sponsors should establish plan committees and oversee their work. The members of the committee should represent a cross-section of skills and interests. Committees should include members from finance and human resources and should include at least some members with investment and financial knowledge. To “oversee” a committee’s work, the Board of Directors or a senior officer should meet with the committee members or with the chair of the committee periodically to ensure that the committee is reviewing the quality and costs of the plan’s investment and services, and that the committee has the resources that it needs to do its job properly.


• Plan committees should meet regularly and should have special meetings as needed. The meetings should have agendas and should allow enough time to fully investigate and discuss the issues. To the extent that committee members may not be aware of the full range of issues they need to consider, an experience investment consultant can help by preparing the agenda and providing information for the committee to consider when discussing the agenda items.


• Committees should engage independent investment consultants with expertise and experience with plans of similar types and sizes. However, committee members should not rely blindly on the recommendations of their consultants, but instead should review their reports and require that the consultants justify their recommendations. Courts consider the use of an independent consultant as evidence of a prudent process. However, courts also insist that the committee members not blindly rely on the consultant, but instead that the members must review the consultant’s reports and ask questions so that they understand the basis for the consultant’s recommendations.


• A committee should work with its consultant to develop an investment policy statement (IPS) and should regularly review and apply the IPS as written. If a committee’s investment approach changes, the IPS should be amended accordingly. An IPS can be a roadmap to fiduciary compliance. For example, many lawsuits are claiming that the committee selected the wrong “share classes” of mutual funds; the IPS could include a provision on selection of share classes to help committee members properly consider that issue. Committee members should consider the provisions in the IPS whenever they are reviewing the plan’s investments. For example, committee members could ask their consultant how the recommendations are consistent with the IPS.


• Committee members should pay particular attention to the fees and costs of the plan’s investments and service providers. Plaintiffs’ attorneys regularly claim that plans pay excessive fees. Committees should regularly benchmark their fees and costs through benchmarking reports, RFPs, or other marketplace information. However, the law does not require that plans pick the cheapest investments or services. Instead, the law is that plans cannot pay more than reasonable amounts for their investments and services. Most plan sponsors don’t have information about the reasonable ranges of fees for plan services and investments. However, plan consultants have access to sources of that information.


• Committees should receive regular fiduciary training. Part of the education should be that the members are fiduciaries and that fiduciaries must act in the best interest of the participants. The training should also cover the basic responsibilities of fiduciaries. New members should receive training at the inception of their service on the plan committee. The Committee engaged an independent investment consultant with experience and expertise in working with plans similar to NYU’s.

Concluding Thoughts

The biggest threats to plan committee members, in their fiduciary roles, is that they won’t know what decisions they have to make or, if they do, they won’t know how to make some of those decisions. The biggest asset in avoiding those threats is the use of an investment consultant who is experienced in working with plans of a type and size of the plan sponsor’s plan. For example, a knowledgeable consultant can help prepare the agenda for meetings, provide reports for the committee when discussing the agenda items, and conduct fiduciary training. As a practical matter, it is hard for plan sponsors to know all of the issues to consider when managing a plan and to have access to the data needed to do the expected analysis.

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.