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Wednesday, August 4, 2021

What are the Best Ways to Avoid a 401K Fiduciary Lawsuit?

There are general guidelines provided by ERISA to follow by plan fiduciaries to avoid any unpleasant surprises in their practice when working with retirement plans. To successfully avoid any litigation and not to fall prey to any lawsuits, it is of a paramount importance to make sure that the necessary infrastructure and tools are in place when conducting any retirement plan business. According to a recent article, “now, is as good a time as any to get your retirement plan committee together to review the plan’s investment lineup and fees”.

This is because there are a lot people now looking at the retirement plans trying to find any reason to start a class action. A recent example is the well-known Tibble vs. Edison case. In this case, Judge Stephen V. Wilson of the U.S. District Court for the Central District of California has ruled for plaintiffs, where the plaintiffs claimed that executives of an Edison International Inc. 401(k) plan breached their fiduciary duties by selecting more-expensive retail-priced shares versus institutionally priced shares for identical investment options.

Of course, the institutional share class is not an answer to all questions or suitable for all plans. But the main takeaway for every advisor from this lawsuit is to be very diligent about how to advise on what funds should be on the menu of the retirement plan. It is necessary to have a screening process that would go through all the funds available to the plan sponsor based on either the provider platform they are using or an alternative platform. An alternative platform should be considered if it can benefit the plan sponsor and plan participants if they would switch to more cost efficient alternatives available on that platform.

Another important point about Tibble vs. Edison is how swiftly an adviser must make a recommendation about the low fee alternative funds, especially low fee share classes. Waiting for the next quarterly review to make a recommendation to change a share class is no longer prudent given that plan fiduciary was aware that a lower fee share class would provide similar investment opportunities to plan participants but at the lower cost.


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