This article is written by Philip Steele AIF, Partner of Cerity Partners, who provide hundreds of evaluations each year to Horton clients and Private Equity firms.
As new class action lawsuits continue to be filed at a record pace, Plan Sponsors, Private Equity firms and anyone who may be deemed to be a fiduciary to a qualified plan, needs to be aware of the settlement outcomes that have resulted in billions of dollars being paid to claimants.
Many of the historical norms in plan design are no longer deemed acceptable as being in the best interest of plan participants and it is these previously acceptable practices that are being called in the majority of class action lawsuits.
Although most cases are centered on fees; fees of investments, fees for record keeping, and virtually any fee that the plan participants are assessed, there are other aspects of plan design that are also commonplace in litigation. Conflicts of interest, proprietary products, revenue sharing, and overall lack of oversight are all common (and at times difficult to defend) components that were cited in litigation complaints.
While these liability exposures may seem relatively easy to detect and avoid, the outcomes of litigation favoring the plaintiffs at some of the nation’s leading Universities and Fortune 500 Companies have all learned the hard way that the task is more challenging than any time over the past 40 years.
In addition to a certain level of unreasonableness in the claims themselves, part of the challenge is that what was judged to be reasonable just a few years ago, may not be so judged by a jury or regulator today. In other words, some components of plan costs, such as investment and record keeping seem to be a moving target.
The settlement of these cases has become so frequent and exorbitant that the underwriters at many major liability insurance carriers are now mandating that employers complete a lengthy plan design questionnaire prior to renewal of coverage. Those employers who have not kept up with current trends are finding that retention rates are being significantly raised or for plans that fail too many of the best practice metrics, coverage can be denied.
When an organization is being considered for acquisition or merger, the due diligence conducted by the buyer needs to be detailed and ideally performed by ERISA consultants that are intimately familiar with current trends and liability mitigation. Whether an asset or stock sale, being aware of a plan’s costs and how well the plan would hold up under the scrutiny of a regulator or litigator is essential.
A detailed analysis of fees, services, compliance history and overall plan design should be conducted prior to close to identify liability risk and areas where costs can be reduced, and liability can be outsourced to a firm that will assume the responsibility for selection, monitoring and oversight of the plan assets. This service is typically provided by a full 3(38) fiduciary, preferably that is CEFEX certified with that certification being subject to annual audit by the Centre for Fiduciary Excellence. This certification helps separate those who adhere to the highest fiduciary standards and practices and those who use the term fiduciary without the expertise or experience in ERISA consulting.
The benefits to Private equity firms of obtaining these evaluations in advance of closing a transaction are many and can help lessen the due diligence burden when a qualified plan exists as part of the transaction. There are also benefits to the employees involved as a result of having a more institutional quality retirement offering whether that’s a improved version of the original plan in question or a brand new plan that’s low cost and benefit rich.
Trends in 2024 are numerous and do not all involve the unpleasant reality of legal and compliance issues. New regulations such as Secure Act 2.0 are providing a great deal of flexibility and enhancements to both sponsors and participants. Financial Wellness Coaching education is also front and center in modern plan design to help employees with decision making far beyond simply picking mutual funds in their 401-k. The most important trend of all is that all these enhancements for employees can be delivered at costs that are far below historical norms all of which provides improved fiduciary liability exposure for employers.
Cerity Partners LLC (“Cerity Partners”) is an SEC-registered investment adviser with multiple offices throughout the United States. Registration of an Investment Advisor does not imply any level of skill or training. The foregoing is limited to general information about Cerity Partners’ services, which may not be suitable for everyone. The information contained herein should not be construed as personalized investment, tax, or legal advice. There is no guarantee that the views and opinions expressed in this brochure will come to pass. Before making any decision or taking any action that may affect your finances or your company’s finances, you should consult a qualified professional adviser. The information presented is subject to change without notice and is deemed reliable but is not guaranteed. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec. gov). For additional information about Cerity Partners, including fees, conflicts of interest, and services, review our Form CRS and ADV Part 2 at www.ceritypartners.com. Please read the disclosure statement carefully before you invest or send money.
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