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Fiduciary Lawsuits Target Smaller Plans: How Can Advisors Mitigate Risk?

December 23, 2016

By Lynn Brackpool Giles

 

Chevron. Edison International. Boeing. Cigna. International Paper Co. Caterpillar Inc.

 

The companies that have faced fiduciary-related lawsuits read like a who’s who across fast-growing industries.

 

More recently, suits have been filed against a host of higher education institutions, including Yale, Duke, University of Southern California and MIT.

 

The stories are mostly the same: Plan sponsors or their affiliates are accused of breaching their fiduciary responsibilities, with the common refrain of “excessive fees for record-keeping and investment management services.” The damages sought from the plaintiffs run into the tens of millions.

 

Now, litigation is targeting small to midsized plans at architectural firms, medical practices, auto collision shops and similar businesses.

 

This trend should put every 401(k) advisor on high alert -- though some have already been this way for quite some time.

 

“Quite frankly, I thought the lawsuits would have started a lot sooner,” says Eric Droblyen, president and CEO of 401(k) plan provider Employee Fiduciary. “Bad fee practices have been in place since the 1990s. But people are now just [saying], ‘Wait, my plan isn’t free?’ Employers weren’t necessarily paying anything out of pocket, but plan providers [were] getting paid somehow.”

 

Droblyen also believes that the Department of Labor’s 2012 fee disclosure rules got people thinking more and more about fees. Then came a spate of high-profile lawsuits. And now, advisors everywhere are noticing a natural trickle-down to smaller plans.

 

Superstar attorney Jerry Schlichter has led the charge with big-name cases, which Droblyen says is one reason it’s becoming easier to sue 401(k) plans.

 

“When Schlichter started, it was new,” Droblyen says. “He prevailed over fiduciary defendants, and there were settlements. This is fertile ground. There is a certain fact pattern that has been established in these cases, and lawyers now don’t have to work so hard to prove their points.”

 

Droblyen cites a “race to the bottom of fees,” but adds that “people are now more attuned to the problem.”

 

“We are in a state of normalization with fees trending downwards,” he says. “The relationships between fees and value are more correlated.”

 

He says smaller-plan participants have the same problems as those in larger plans.

 

“There’s still fiduciary apathy,” he says. “Who wants to do a deep dive into 401(k) fees?”

 

But dive they must: Plan sponsors and advisors must act as good fiduciaries and demand transparency from providers, he says.

 

“A 401(k) plan isn’t free, and you need to know what you are paying for,” Droblyen says. “Percentages are conceptual to many. One to 2 percent sounds small, but when you see it translated into dollars, it’s more meaningful.”

 

What should advisors and plan sponsors be doing to mitigate fiduciary risk? Droblyen offers these key considerations.

  • Know your options before you start shopping for 401(k) services. “Too many fiduciaries shop for service providers backwards – they start shopping before they understand their options,” he says. “When this happens, it can be easy for 401(k) providers to sell overpriced or superfluous services to 401(k) fiduciaries due to an asymmetrical information advantage. Make sure you first understand the plan administration and investment options you want for your 401(k) plan.”
  • Compare professional service providers. “Compare the competence, service and fees of at least three providers,” he says. “Don’t pay too much for administrative or investment services. Look for baselines and returns that can offset costs.”  
  • You don’t have to pick the cheapest provider or investment, but there must be value.  “Advisors must also be able to explain their value or they are putting a client at risk,” Droblyen explains. “It’s not super difficult to avoid excess fees; you just need to have some questions.”

 

Technology can also enhance the value proposition of an advisor striving to manage fiduciary responsibilities.

 

“Technology is important when you have to justify exemptions,” he says. “It is also good to have a paper trail as a fiduciary, and technology can help track the prudent steps you have taken to make your investment decisions.”

 

He adds that the DOL’s upcoming fiduciary rule is only going to help the advisor-plan sponsor relationship.

 

“The rule will ensure that both the sponsor and advisor are subject to the same standard of care,” Droblyen says. “In the past, a broker didn’t have to make recommendations in the best interest of the participants, but the plan sponsor did. The shared fiduciary standard gives them the same set of rules.”

 

Other developments that Droblyen thinks will help lessen fiduciary exposure includes changes to Form 5500, expected in 2019, which put fees front and center on disclosure materials.

 

“We haven’t always been able to get information from these returns because we couldn’t see the fees,” he says. “How do you know what’s too much if you can’t benchmark?” 

 

Pulling the curtains back on many aspects of the 401(k) plan process will ultimately increase transparency and help the advisor manage fiduciary risk.

 

“I’m a big believer in sunlight being the best disinfectant,” Droblyen says.


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