Appointing an Independent Fiduciary May Keep Plan Sponsors Out of Court

The wave of ERISA litigation continues to grow – plan sponsors ignore the danger signs at their peril.

Back in the 1990’s, ERISA litigation focused primarily on stock drop cases against multibillion-dollar plans. By 2020 however, the types of claims made against plans have multiplied. Now, even plans with less than $100 million of plan assets face the risk of litigation. 

In recent years, ERISA litigation has become a cottage industry, and the trillions of dollars in qualified plans prove to be an attractive target. Initially two or three firms specialized in this litigation, but the industry has matured. Dozens of law firms now pursue these claims and they are supported by analysts combing through databases, and search firms who specialize in identifying lead plaintiffs. The internet, open architecture databases and the lure of large payouts, continue to propel the litigation industry.

This litigation has faced mixed results in the courts. While some plan sponsors have succeeded in having the claims dismissed early in the litigation process, others haven’t been so lucky. Failure to succeed on a motion to dismiss can be expensive, yet rarely do these cases go to trial. Instead, they settle – and the settlements can be large. Plaintiffs’ counsel understand this.

Larger plans are often in a better position to defend breach of fiduciary duty claims. Typically, they are supported by staff professionals who have the resources to consult with leading ERISA counsel who offer advice on the latest regulatory and litigation trends. That being said, even the largest plans are challenged by the task of transforming outside legal advice into robust procedures capable of withstanding litigation.

Smaller plan sponsors, however, don’t have the same resources to devote to plan stewardship. But, whether a plan is $5 billion or $50 million, the same fiduciary principles apply and similar focus must be paid to support these plans.

How can smaller plans navigate these turbulent waters?

Hiring an independent fiduciary can significantly mitigate the risk of litigation. ERISA allows plan sponsors to delegate the fiduciary responsibilities to an independent fiduciary. Relieved of these duties, senior management is free to focus exclusively on executing its business strategies. 

A qualified independent fiduciary would be an expert in all aspects of plan oversight and management. Its core competencies would include the very targets of litigation:

  • Oversight of company stock
  • Reasonableness of investment, administrative, recordkeeping fees (with an understanding of revenue sharing)
  • Monitoring investment performance and diversity of offerings
  • Protecting participant confidential information
  • Safeguarding against fraud and cyber attacks

ERISA plans require fiduciary stewardship and plan sponsors have a choice; either they can spend the time and resources to develop the expertise internally or they can delegate the responsibility to an independent fiduciary.  

Given the choice between a plan monitored by an experienced independent fiduciary or one that is self-managed, where are plaintiff’s lawyers going to direct the torrential winds of litigation? With an independent fiduciary at the helm, plan decisions will be made solely in the interest of plan participants while still enabling the plans to navigate through the threatening waves of litigation without taking on water or being knocked off course. Both plan participants and plan sponsors can expect smooth sailing with an independent fiduciary serving as captain of the plan.  


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