Contact Us (858) 444-2300


Fiduciary Litigation: Best Practices for Defined Contribution Plan Fiduciaries

Posted by Corey F. Schechter | Aug 10, 2018

Retirement plan sponsors have a continuing fiduciary duty to plan participants in a defined contribution plan. When employees allege the employer or plan sponsor has not acted in the sole interest of the participants or followed the plan requirements, the plan sponsor may be liable for losses and damages which result. However, by following the best practices for defined contribution plan fiduciaries, plan sponsors can avoid litigation and limit potential losses.

Defined contribution plans are retirement plans where the employee contributes a defined amount to their retirement account. Contributions are generally based on a set amount or percentage of the employee's paycheck. The sponsor will often match a portion of the employee's contribution, up to a set amount. Among of the most common defined contribution plans are the 401(k) and 403(b) tax-deferred benefit plans.

Qualifying benefit plans, including 401(k)s, are generally subject to federal ERISA laws and regulations. This includes a fiduciary duty for plan sponsors and administrators to act in the sole interest of plan participants and beneficiaries. The Department of Labor has issued guidance for plan fiduciaries to meet their ERISA responsibilities, which include the following “best practices”:

Diversifying Investments

A fiduciary has a responsibility to reduce the risks of heavy losses by diversifying plan investments. Each investment is part of the plan's portfolio and should be considered in light of the overall investment strategy. To avoid allegations that the fiduciary put plan assets into an overly-risky or unsound investment, a fiduciary can limit their own liability by documenting their evaluation and investment decisions at the time of the investment.

Defraying the Reasonable Costs/Fees of Plan Administration

Fees and expenses charged for administering plans should be “reasonable.” What may be reasonable may depend on the types of services covered. It is also important for fiduciaries to monitor fee changes and expenses. When fees are no longer reasonable, the fiduciary should respond accordingly. Fiduciary prudence dictates seeking a request for proposal on the cost of plan administration from multiple recordkeepers every few years to ensure the fees being paid are still reasonable in relation to the overall market.

Monitoring Investment Performance

The duties of a fiduciary are ongoing. This includes monitoring investment performance and reviewing replacement investments or services. Changes in fees or returns should be evaluated for the overall benefit to plan participants. Again, monitoring and decision-making should be well-documented to protect the fiduciary from future liability in the event of fiduciary ERISA litigation. All things being equal, courts have routinely found that the process in the decision-making is paramount to the overall outcome of the investments' future performance.

Avoiding Conflicts of Interest

Transactions between parties in interest may be prohibited and could lead to fiduciary liability. Prohibited transactions include sales, exchanges, loans, or furnishing goods between the plan and any party in interest (including the employer, plan fiduciary, or owners).

Keep Participants and Beneficiaries Informed

ERISA generally requires regular updates and informing participants and beneficiary of plan changes. Participants and beneficiaries are to be provided the summary plan description (SPD), summary of material modifications (SMM) and regular individual benefit statement (IBS).

Following these best practices for defined contribution plan fiduciaries and avoiding common mistakes of plan sponsors and fiduciaries can help avoid costly litigation and reduce fiduciary liability.

San Diego ERISA Litigation Attorneys

If you have any questions about fiduciary best practices, are facing fiduciary litigation, or believe your plan fiduciaries are not fulfilling their duties under the law, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm with a focus on employee benefits law. Contact our office today with any questions on how we can help.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.


Subscribe to our Newsletter