The landscape of risks for employee benefit plan fiduciaries includes some fresh wrinkles on longstanding issues and some brand-new developments, such as last summer’s Supreme Court ruling overturning the Chevron doctrine.

Attorney Todd Solomon, a partner at McDermott Will & Emery LLP in Chicago, Illinois, identified the following top five risks for benefit plan fiduciaries during a session at the 43rd Annual ISCEBS Employee Benefits Symposium in September 2024.

1. Rising Benefit Claims 

Claims against benefit plans are on the rise as plaintiffs’ lawyers seek recoveries and fees. These claims include a new raft of class action suits filed against defined benefit (DB) pension plan sponsors over annuity lift-outs. When a plan conducts an annuity lift-out, it shifts a group of pension plan participants, such as terminated vested participants, out of the plan and buys an annuity from an insurance company to fund their benefits.

Close to a dozen class action lawsuits have been filed over this issue, so Solomon advises plan committees to think carefully about how they approach such a transaction.

2. New Allegations Against Plan Sponsors

Litigation over 401(k) plan fees has been around for more than a decade, but plaintiffs’ attorneys are developing new accusations. Solomon suggests that plan sponsors should prepare for another surge of filings since these cases tend to spike after a period of economic uncertainty. In addition, attorneys are now pursuing claims against small employers and nonprofits as well as larger plans.

“It’s often targeting who they think they can extract a big settlement from,” he said, adding that settlements averaged about $9.3 million from 2016 to 2022.

Fee litigation focuses on the following issues.

• Excessive recordkeeping fees or fees that are paid as a percentage of assets rather than on a fixed basis.
• Failure to remove underperforming funds. Target-date funds (TDFs) and stable value funds are often singled out in these allegations.
• Failure to offer less expensive funds when they are available. “This is actually a very legitimate allegation,” Solomon said. Committees should regularly check in with their advisors to make sure they are in the cheapest share class and ask whether fees can be reduced. That process also should be documented in committee minutes.  
• Failure to negotiate lower fees and/or seek competitive bids.
• Failure to monitor third-party fees.

3. Increased Government Audit and Enforcement Activity

“We’re seeing a lot more DOL audit activity, especially focused on cybersecurity,” Solomon commented.

The Department of Labor (DOL) issued three-part cybersecurity guidance in April 2021 that included tips for hiring a service provider, cybersecurity program best practices and online security tips. “No one realized how much the DOL would focus on this so quickly,” Solomon said. “Any DOL audit on the retirement side—and now health and welfare plans—is focusing significantly on cybersecurity.”

He recommends that fiduciary committees get ahead of the issue by bringing cybersecurity staff to their meetings at least once a year in addition to having vendors present on their cybersecurity practices. “The vendors are doing good work, but you as a fiduciary have to need to ensure that you’re aware of that good work and show that you’re kicking the tires on this issue,” he said.

He predicted that cybersecurity has the potential to develop to the next level of litigation for plans, noting that the DOL recently clarified that its cybersecurity guidance applies to health and welfare plans.

4. Back-and-Forth Political Climate for ESG Investment Decisions

The DOL has changed its position several times on whether plans are complying with the Employee Retirement Income Security Act (ERISA) if they consider environmental, social and governance (ESG) factors when making plan investments. The current DOL rule allows plan fiduciaries to consider ESG factors, but that position may shift again under a new presidential administration. Plans that want to consider ESG factors in investment decisions should ensure that they conform with current DOL policy.

5. New Litigation on the Use of Forfeitures

Litigation over the use of forfeited retirement plan funds is on the rise, with more than a dozen cases filed in the last few months, Solomon said.

Forfeitures occur when participants who are not vested in their employer’s defined contribution (DC) plan contributions terminate from the plan and equate to “millions of dollars of pots of money for plans,” Solomon explained. The Internal Revenue Service (IRS) has maintained for years that it is appropriate for plans to use these forfeitures to pay expenses or to reduce plan expenses as long as the plan document allows it, he added.

However, plaintiffs’ attorneys have been empowered by the recent Supreme Court ruling overturning the Chevron doctrine and have begun filing lawsuits against plans that use these forfeitures to pay plan expenses or reduce the employer’s contribution instead of reallocating them to participants.  “Now it’s a very tricky business. I’d be very cautious about what I was doing with forfeitures and at least get that in front of the fiduciary committee because it’s clearly a fiduciary function, and it’s clearly under attack,” Solomon advised.

Chevron Overruled

Retirement plan forfeitures are just one area of risk affected by the Supreme Court’s Loper Bright Enterprises v. Raimondo decision in June 2024 overturning the longstanding Chevron doctrine, Solomon predicted.

The initial Chevron decision was issued 40 years ago and held that courts reviewing a challenge to a law should give deference to the agency’s interpretation where the statute is ambiguous. “The decision is rooted in the idea that agencies—not courts—have subject matter expertise and are familiar with the policy involved in implementing federal laws,” Solomon explained.

The Supreme Court ruling in June raises questions about who decides what laws mean when they aren’t clear—courts or agencies, he said, adding that it has a potentially significant impact on benefit plan issues. A Texas court is already set to hear a challenge to the DOL’s rule on permitting ESG investments in 401(k) plans.

“Everything we kind of thought we knew is potentially under examination or up to challenge,” Solomon remarked. “It’s a very big case in the retirement and health and welfare context.”

How Fiduciary Committees Can Protect Themselves

As they face this uncertainty, Solomon suggested the following strategies for fiduciary committees.

• Understand the investment policy and regularly review it. Don’t be too prescriptive. Committees should make sure that they follow anything they put in their investment policies or lean toward being more general.
• Meet regularly. Holding quarterly meetings is the best practice for fiduciary committees.
• Regularly review investment advisor performance. Issues to review include whether the plan is paying too much for services, whether the committee has failed to review and over-reliance on the advisor.
• Keep good meeting minutes. “Minutes are an art and not a science,” Solomon said. “You know good minutes when you see them.” Committees should avoid under-developed minutes but also stay away from blow-by-blow accounts.
• Follow a well-documented process.
• Establish policies. In addition to investment policy, committees should have record retention and cybersecurity policies.

Solomon added the following tips specifically for protecting against fee litigation.

• Have a documented and repeatable process for evaluating fees. Processes might include conducting fee surveys, benchmarking and issuing requests for information (RIFs) and requests for proposals (RFPs).
• Fees need to be reasonable but don’t always have to be the lowest. Committee minutes should point to a discussion on this issue.
• Fees should not be considered in vacuum. The quality of the service provider, scope of services rendered and the value delivered are additional factors to consider.
• Closely review plan expenses to ensure only reasonable expenses are charged to the plan.  The determination needs to be made at the provider level and includes administrative fees (recordkeeper, TPA), investment management expenses, fiduciary consulting and audit, legal or other.
• Evaluate options for fiduciary liability insurance coverage.

The content in this blog post originally appeared in an article in the 2024 fourth-quarter issue of NewsBriefs.