The fiduciary’s dilemma

August 17, 2016

Much 401(k) plan fiduciary practice in recent years has been driven by litigation, particularly with respect to fees. In this article we discuss the challenge 401(k) plan fiduciaries face when they are confronted with the need to make a change in, e.g., the plan fund menu or plan providers, when there is the possibility that the fact of that change or the things they say about it may be used against them in a fiduciary lawsuit.

We begin with an example of this problem taken from the complaint recently filed against Massachusetts Institute of Technology (MIT) plan fiduciaries.

MIT complaint

In the MIT case (Tracy v. Massachusetts Institute of Technology, United States District Court For The District Of Massachusetts), plaintiffs assert that “Defendants have admitted that the prior Plan structure caused unreasonable fees to be charged to the Plan.” In support of this claim, plaintiffs cited, among other things, (what appear to be) committee minutes and employee communications in connection with the 2015 changes.

Here are some quotes from the complaint:

59. When describing the reasons for the 2015 Plan changes, Defendants stated that the changes served to accomplish three main objectives:

• Position MIT for increasingly demanding legal and regulatory standards applicable to 401(k) plans.

• Create opportunities for lower investment costs and higher overall value to participants by consolidating assets into fewer funds….

• Respond to feedback from faculty and staff that the vast number of choices offered in the current line-up is confusing. …

60. Defendants also concluded that the revised investment lineup allowed the Plan to “[l]everage MIT’s institutional purchasing power to offer both passively and actively managed options at the best possible cost for participants”, and in some cases, provide funds “in a better share class with lower fees”.

61. Defendants reiterated these principles during an “Administrative & Fiscal Officers Meeting”.

These actions by MIT fiduciaries are used by plaintiffs in their complaint as, in effect, an admission, supporting plaintiffs’ claim that the fiduciaries violated ERISA’s prudence standard by:

[R]etain[ing] multiple investment options in each asset class and investment style, thereby depriving the Plan of its ability to qualify for lower cost investments, while violating the well-known principle for fiduciaries that such a high number of investment options causes participant confusion.

And the lower fees under the new fund menu are used by plaintiffs as an index of how much the prior, allegedly imprudent, fund menu cost participants:

The inefficient and costly investment structure of the Plan caused significant harm to the Plan and its participants in the form of unreasonable investment management fees and performance losses compared to readily available lower-cost alternatives. This harm and the substantial losses to the Plan are firmly illustrated after evaluating the recent 2015 fund lineup changes. (Emphasis added.)

The fiduciary’s dilemma

The MIT case illustrates the rock-and-the-hard-place that plan fiduciaries may find themselves between when they decide that they can (and should) get a better deal for their participants on, e.g., plan investment or recordkeeping fees. Making the change may be used by some plaintiff’s lawyer as an alleged “admission” that the old deal was imprudent. Indeed, any change in current practice could conceivably be spun by a plaintiff’s lawyer as such an admission.

It’s interesting to note that in personal injury law, under Federal Rules (at least), “When measures are taken that would have made an earlier injury or harm less likely to occur, evidence of the subsequent measures is not admissible to prove: negligence; culpable conduct; a defect in a product or its design; or a need for a warning or instruction.” It’s unlikely that that sort of rule would be applied in the context of 401(k) fee litigation.

What is a fiduciary to do?

So what is a prudent 401(k) plan fiduciary to do, when confronted with the need for a (perhaps overdue) change in the plan’s funds, fund menu or recordkeeper?

It is a commonplace that the main concern of many DC plan sponsors and sponsor-fiduciaries is the avoidance of litigation, the critical question being: “What do I have to do to not get sued?” And yet it’s probably fair to say that most attorneys advising sponsors and sponsor fiduciaries are not litigation attorneys – they are retirement benefits experts.

We are not attorneys and, in the end, cannot answer this question. But we can offer the following observations:

Inaction is not an option. If a fiduciary concludes that, e.g., the inclusion of a fund in the fund menu is imprudent or a recordkeeper’s fees are too high, then generally she must take action. That is the law.

What is done generally may be used in litigation. As we can see in the MIT case, the simple act of making a change can be used by plaintiffs to make their case – e.g., by comparing the new fees with the “old” ones. Consider a process in which plan fiduciaries engage in an RFP resulting in the retention of a new recordkeeper at a new, significantly lower price. A plaintiff may assert that the old price was too high. A fiduciary cannot change these facts. They are “inevitable” – in the sense that technology and competition will tend to drive down the cost of recordkeeping, and it will often be the case that the plan can reduce recordkeeping costs by engaging in a re-bidding process. Perhaps the best defense here is to maintain a disciplined process: determine a reasonable time frame for re-visiting/re-bidding recordkeeping and stick to it.

What is said generally may be used in litigation. At a minimum, fiduciary committee minutes and participant communications will be discoverable. When, with respect to a given action, plan fiduciaries are seriously concerned about possible litigation, they may want to consider having the language used to describe the reasons for any change reviewed by a litigation attorney.

Make sure the Investment Policy Statement reflects fiduciary practice. In Tussey v. ABB, plaintiffs attempted to weapon-ize the ABB plan Investment Policy Statement against defendant fiduciaries. If the IPS says one thing – e.g., that a fund that underperforms its benchmark for 2 years will be removed – and the fiduciaries (perhaps for perfectly good reasons) do something else, plaintiffs may seek to use that dis-continuity between policy and practice against plan fiduciaries.

Does the attorney-client privilege apply? It may be possible to “shelter” some deliberations from discovery by asserting the attorney-client privilege. To do this, however, an attorney will have to be involved: in the Tussey litigation, communications from a consultant (that is, a non-attorney) were used to establish a fiduciary breach. The same communications from an attorney might conceivably have been “privileged” and therefore not discoverable by plaintiffs.

But the attorney-client privilege is limited in ERISA litigation. But (and this is a very big “but”) generally (and oversimplifying and ignoring several nuances), in a participant lawsuit, a defendant-fiduciary cannot claim the attorney-client privilege with respect to communications with the plan’s attorney. Indeed there are significant questions as to when (if at all) the privilege may apply. Moreover, certain actions – e.g., including an attorney’s advice in committee minutes – may result in a waiver of the privilege. Thus, in considering an action that might be an element of some future litigation, fiduciaries should determine whether their deliberations are discoverable and whether (if at all) the attorney-client privilege applies.

* * *

The problem we’ve just sketched out has no easy solution. If a past practice was (or can be alleged to be) imprudent, you can’t change that fact. And if you cure that past practice – by replacing a fund or a recordkeeper – that action, in itself, may draw the attention of plaintiffs’ attorneys. The alternative – to continue the imprudent practice – is obviously not an option. So, in a sense, as a plan fiduciary, you are stuck.

You can, however, choose what you say about what you are doing. And you can – and this is probably the most important thing you can do in this situation – consult with counsel. In that regard, and especially if “not getting sued” is one of your primary concerns, you may want to consider consulting with litigation counsel. And in doing so, you will want to be clear about whether the attorney-client privilege applies to those consultations.

October Three Consulting, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.

Through effective plan design strategies October Three believes successful financial outcomes are achievable for employers and employees alike. A critical element of those strategies is the ReDB® plan design. The ReDefined Benefit Plan® represents an entirely new, design-based approach to retirement and to the management of both the employer’s and the employee’s financial risk, focusing on maximizing financial efficiency and employee value.

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