There is nothing a plan sponsor or ERISA fiduciary can do to prevent allegations of fiduciary breach; however, there are many things they can do to be prepared to rebut such claims. Unfortunately, because of “headline news,” it is easy for plan sponsors to focus on cautionary tales of what other plan sponsors and fiduciaries did wrong. However, it is just as important, if not more so, to be aware of what plan sponsors and fiduciaries did right….in their legal victories. Two recent fiduciary victories provide valuable insights into how a court would evaluate the decisions and processes of plan committees.[1] In these cases, the courts highlighted conduct by the fiduciaries as evidence that they did not breach their fiduciary duties. Specifically, the judges focused on having a process of review, seeking outside help, and diligently maintaining records. The favorable views of these activities provide guidance for other plan sponsors and fiduciaries regarding how their conduct will be viewed if they face similar claims in the future.
Have a Process
The fiduciaries in both cases had evidence of a process for reviewing fees and investment options, which persuaded both courts that the fiduciaries acted prudently.
In one case, the court notes that the fiduciaries periodically reviewed disclosures and invoices from services providers to ensure that the compensation paid to third parties for their services to the plan was reasonable.[2] The fiduciaries even had a process to leverage the fee arrangement for services that the court found to fall outside of fiduciary control for a discount on the overarching recordkeeping fees.[3]
In the other case, upon reviewing meeting minutes, the court notes that the meetings “included discussions on topics that included review of investment options and performance, recordkeeping and other fees, overviews of fiduciary responsibility, streamlining the fund lineup, converting to lower-cost share classes, amendments to the Committee charter, reviews of the difference between certain annuity contracts and more recently available annuity options.”[4] The court found these discussions were persuasive evidence that the committee members acted with prudence and care even if they did not ultimately decide to change service providers.
A process for regular review of fee arrangements with their plan’s service providers, and the costs and quality of the plan’s investment options, are steps fiduciaries can take that will pay dividends in the long run.
Seek Outside Help for Guidance, Not Reliance
As part of a process of fulfilling fiduciary responsibilities, it is important for fiduciaries to seek counsel and advice from individuals or entities outside of their companies. However, as the case law shows, it is also important to not rely blindly on the advice of outside consultants.
In one case, the fiduciaries—the plan committee members—hired outside experts to review the disclosures and invoices from the recordkeeper, which the fiduciaries used in their analysis. Additionally, the fiduciaries used outside consultants to assist with the negotiations for a new contract with the recordkeeper, which resulted in a discount in the recordkeeping fees.[5] Based on these facts, the court held that the fiduciaries showed that they acted prudently in monitoring the recordkeeping fees paid.[6] In other words, the use of knowledgeable and independent consultants is evidence of having engaged in a prudent process.
In the other case, the fiduciaries hired a third party to act as an investment adviser. The expertise of someone who is independent from the plan sponsor and the investment providers is valuable; however, it is important to not exclusively rely on the recommendations of the adviser. The court noted that some of the committee members relied too heavily on the advice of the investment adviser, finding that “blind reliance is inappropriate” as a matter of law.[7] Fortunately, the independent review and thinking of other committee members and their engagement in the process of evaluating the investments saved the day, as the court discussed how some members “questioned [the consultant’s] recommendations all the time.”[8]
To summarize, it is critically important for fiduciaries to seek outside advice from experienced and independent consultants, as it shows a significant level of care and consideration in the execution of the committee’s fiduciary responsibilities; however, it is also important to realize that the adviser is just a consultant and that the final decisions are the committee’s to make. In that regard, the committee members should think independently and critically, and question the consultant until they are satisfied that they thoroughly understand the bases for the recommendations. As several judges have said, it is inappropriate to blindly rely on the advice of a consultant.
Diligently Maintain Records
Maintaining accurate and complete records is one of the most important actions that fiduciaries can take to prepare for the possibility of litigation. Without accurate and easily authenticated records, it is much more difficult to show diligence, since there isn’t a paper trail to serve as evidence in support of the committee’s activities.
In both of these cases, diligent recordkeeping allowed the fiduciaries to rebut the plaintiffs’ allegations. In one case, the judge noted the series of regular meeting dates and corresponding minutes, and records of the minutes and reports being received and reviewed by fiduciaries before the next meeting.[9] In the other case, the court noted that the fiduciaries produced “substantial evidence” including service agreements, quarterly invoices, meeting minutes, and independent reports analyzing the financial terms of the service agreements.[10]
In short, there is a possibility that these cases would have had successful outcomes if the fiduciaries had not maintained accurate and complete records. However, without those records, it could have been more difficult for the courts to determine that the fiduciaries acted prudently.
Conclusion
When fulfilling their responsibilities, fiduciaries should consider what actions they need to take to fulfill their duties; however, they also should consider how they can prove that they fulfilled their duties. Having a thoughtful process, seeking expert advice, and diligently maintaining records may not prevent claims of fiduciary breach, but they are steps plan sponsors and fiduciaries can take that will rebut those claims.
[1] Alas v. AT&T Srvs., Inc., No. 2:17-cv-8106, 2021 WL 4893372 (C.D. Cal. Sept. 28, 2021) appeal docketed sub nom. Bugielski v. AT&T, No. 21-56196 (9th Cir. Oct. 28, 2021); Sacerdote v. New York University, 328 F. Supp. 3d 273 (S.D.N.Y. 2018). Note that the Second Circuit revived certain dismissed claims in Sacerdote, but did not disturb the decision on the claims that went to trial. See Sacerdote v. New York University, 9 F.4th 95 (2d Cir. 2021).
[2] AT&T, 2021 WL 4893372 at *8.
[3] Id. at *9.
[4] NYU, 328 F. Supp. 3d at 291.
[5] AT&T, 2021 WL 4893372 at *8.
[6] Id.
[7] NYU, 328 F. Supp. 3d at 291.
[8] Id. at 292.
[9] NYU, 328 F. Supp. 3d at 307-08.
[10] AT&T, 2021 WL 4893372 at *11.
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