More than 100 companies filed a lawsuit against investment companies in 2020 for breach of fiduciary responsibility. The plaintiffs alleged that the investment companies acting as fiduciaries mismanaged their employees’ accounts by charging excessive fees, making administrative errors, and/or failing to make prudent investment decisions.

According to liability experts Hauser Insurance Group, the Employee Retirement Income Security Act (ERISA) made this type of litigation possible. The federal government established standards for managing retirement savings accounts nearly 50 years ago to protect plan participants from abuse by their fiduciaries.

Paying out the lawsuits cost the defendants hundreds of millions of dollars, something Hauser Insurance Group would like to help other fiduciary businesses avoid. A representative of the firm recently offered the tips highlighted below to allow companies to better protect themselves from fiduciary liability.

Update Training Policies and Internal Documentation Regularly

When litigation occurs under the ERISA, courts request copies of the fiduciary’s training policies and internal documentation to determine if it abided by all laws. Judges focus their attention on written documentation outlining each phase of the investment process. The best way for plan sponsors to have charges against them dismissed is by demonstrating compliance and a proactive commitment to describing its processes clearly.

Hauser Insurance Group recommends that plan sponsors commit to ongoing training related to fiduciary responsibilities. The insurance group’s representative also advised companies with fiduciary power to create a written rationale for investment decisions and always demonstrate complete transparency about fees.

Adhere to a Written Investment Policy Statement (IPS)

The ERISA, sponsored by the United States Department of Labor, encourages fiduciaries to implement a written IPS. Hauser Insurance Group agrees with this recommendation, and the United States Department of Labor considers it a best practice.

Companies benefit in two ways by committing to using an IPS. First, the document creates the structure for responsible fiduciary oversight to occur. Secondly, the IPS creates a basis point for financial decisions related to investments in the future and mitigates disputes between committee members with different opinions.

Here is some specific information to include in an IPS:

         Explanation of the prudent process the organization uses to choose and monitor client investments.

         When choosing a third party for investment management and plan administration, the plan sponsor should include information about that company’s performance in its IPS.

         Plan sponsors should choose language for the company’s IPS documentation carefully to avoid giving any appearance of an ERISA violation.

Ensure Compliance with Safe Harbor Requirements

The ERISA mandates that plan sponsors meet the requirements of Section 404(c) when creating the company’s safe harbor requirements. Fiduciaries should understand that qualifying for safe harbor status requires them to comply with several requirements related to plan design, investment options, and plan administration.

By complying with the safe harbor requirements under the ERISA, plan sponsors are not liable for losses resulting from an investment directed by the participant. Fiduciaries must also commit to sending regular participant disclosure notices to remain in compliance. Hauser Insurance Group recommends hiring a third-party administrator or onsite recordkeeper to ensure the disclosure notices contain correct information and go out on time.



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