Because 401(k) plans play an increasingly prominent role as an employee's principal retirement investment vehicle, fiduciaries overseeing those plans face increased pressure to see them perform well. This same pressure has led to steadily increasing Employee Retirement Income Security Act (ERISA)-based litigation challenging the selection of mutual funds and like investments offered in these plans, and the fees associated with recordkeeping and the management of funds' investments. Because of its dynamics (small individual losses but high litigation costs), most fee litigation is entrepreneurial, and offers the possibility of "incentive awards" to named plaintiffs many times greater than any claimed losses.

Further incentivizing litigation in the ERISA arena, some recent attorneys' fees awards may encourage the plaintiff's bar to take hard looks at plans to determine whether to bring such litigation. For example:

• In December 2015, on remand from the Eighth Circuit, the court in Tussey v. ABB, Inc. awarded $11.6 million in attorneys' fees and expenses.^[1]

• In November 2015, both Novant Health and Boeing agreed to settle fee-related suits, pending court approval, for $32 million and $57 million respectively.^[2]

• In April 2015, in Haddock v. Nationwide Financial Services, Inc., the court approved a $140 million settlement that included attorneys' fees and expenses of more than $50 million.^[3]

• In July 2015, the parties in Krueger v. Ameriprise received final approval of a $27.5 million settlement with $9.2 million in attorneys' fees.^[4]

These recent awards and settlements are likely to encourage more lawsuits; however, these cases can also provide valuable insights to employers and fiduciaries on defenses to these claims.

To preview, Tatum v. RJR Pension Investment Committee illustrates the typical fee-litigation risks and the importance of a prudent process, i.e., of procedural prudence. In Tatum, the court found the fiduciaries had not conducted a prudent process in deciding to eliminate Nabisco stock from the plan. As a result, it applied a "would have" standard, which requires a fiduciary to show that the decision made was not merely permissible (all that would be needed with a prudent process), but the best or compelled one.^[5]

In Tibble v. Edison International, the Supreme Court recently made clear that ERISA imposes some duty to periodically monitor plan investments, even if the investment was initially selected outside the fiduciary six-year statute of limitations period.^[6]

And in Tussey v. ABB, Inc.,^[7] although numerous claims were dismissed, the Eighth Circuit affirmed a determination that ABB violated ERISA by failing to consider the reasonableness of fees charged by its fund recordkeeper, finding that "ABB never calculated the dollar amount of the recordkeeping fees the Plan paid [. . .] via revenue sharing arrangements," even after an outside consulting firm told ABB that it was overpaying for recordkeeping fees. In determining the $13.4 million that the plan overpaid for recordkeeping costs, the district court credited plaintiffs' expert witness, who used fees paid by a similarly sized retirement plan for Texas employees as the comparator, and that this was in line with trends as to what were reasonable revenue-sharing earnings for other plans.^[8]

Potential Practices to Mitigate Risk

The outcomes of these and other cases, and the incentives they create for potential plaintiffs, demonstrate the importance of properly managing and administering plans. By illustrating areas of potential exposure, these cases provide guidance for developing prudent fiduciary practices that can help lessen that exposure. With these decisions in mind, there are some general practices that all plan fiduciaries should consider adopting or strengthening—all with the critical caveat that the fiduciary process leading to, and implementing, these (and other) decisions needs to be well documented.

As cases like Tatum and Tussey teach, having a well-documented, prudent fiduciary process is "rule one" that can control the defense. Further, as part of general practices, the plan fiduciary with responsibility over plan investments should consider developing and following an investment policy statement.

The applicable plan fiduciaries should conduct periodic reviews of investments and plan service providers, which for investments is common to do quarterly, with a major one annually. Plan fiduciaries may also want to consider periodic benchmarking or requests-for-proposals for major service providers such as recordkeepers. Cases like Tussey illustrate the danger if the plan fiduciary does not periodically monitor fees paid to recordkeepers (in that case, revenue-sharing payments) and failing to evaluate the recordkeeper's overall compensation. Note, though, that a fiduciary does not have to go with the lowest-cost provider; as part of proper fiduciary documentation, quality and service can and should be considered in evaluating any service provider.^[9]

The same need for prudent investigation and process applies to selection and monitoring plan investments. For example, in Tatum, the plan fiduciary faced continued risk of liability (after 12 years of litigation the case has been remanded for trial) for eliminating an orphan single-stock fund without a prudent process, even though the decision to liquidate an orphan stock fund is not, in and of itself, imprudent. In contrast, in Tussey, replacement of one fund with another that (with hindsight) turned out to perform more poorly was not a breach because the plan fiduciary had followed a prudent fiduciary process in making that decision.

Other areas that have created liability include the selection of share classes. Cases like Tibble illustrate the need (perhaps judged with a bit of unfair hindsight) for plan fiduciaries, as part of their prudent process, to investigate ways to save fees, such as by asking whether institutional share classes are available for the plan. Conversely, Tibble also shows the value of a prudent process, dismissing claims challenging the selection of a money-market fund because the plan fiduciaries had:

• Researched and compared the fees of four comparable funds;

• Reviewed the comparable funds (including fees) of seven candidates that responded to a request for proposals;

• Consistently monitored the fund's performance net of fees, which revealed that the fund performed consistently well (net of fees) throughout the period from 1999 to 2008;

• Periodically reviewed the reasonableness of the fees, which were reduced in 2005 and 2007; and

• Conducted an extensive review of the fund in 2008.

Finally, a practical way to lessen risk regarding plan investments is to offer a mix of investments, including target-date funds and lower-cost index funds. A prudent process documenting plan fiduciaries' offering of a mix of index funds to provide participants low-cost investment options can be a powerful rebuttal to hindsight-based claims that actively managed funds cost too much and performed relatively poorly. For example, in Hecker v. Deere & Co.,^[10] the Seventh Circuit agreed with the district court's statement that "[i]t is untenable to suggest that all of the more than 2,500 publicly available investment options had excessive expense ratios" and affirmed dismissal of plaintiffs' claims at an early stage in litigation. Dismissal of fiduciary breach claims was likewise affirmed in Loomis v. Exelon Corp., in which the defendant "offered participants a menu that includes high-expense, high-risk, and potentially high-return funds, together with low-expense index funds that track the market, and low-expense, low-risk, modest-return bond funds." The Seventh Circuit stated that the defendant "left choice to the people who have the most interest in the outcome, and it cannot be faulted for doing this."^[11]

There are additional issues that may arise for small and midsize firms. Not all small to mid-size companies will have the investment and provider management expertise in house, or have the time to properly document and monitor the 401(k) plan and its various providers. Therefore, they may want to consider outsourcing fiduciary management of 401(k) plans to outside fiduciary professionals. Further, if adopted as proposed, the U.S. Department of Labor's new fiduciary rule will strongly encourage adoption of this "professional manager" approach for small plans under 100 participants, because the proposed rule, otherwise, makes it difficult for financial advisors to sell products and services directly to these small plans.

Proskauer's Perspective

Recent decisions and settlements have shown that fee litigation operates like hydraulic pressure, probing for liability in any weak part in plan management and administration, even if the 401(k) plan is, overall, sound and well managed. Simply put, any failure of procedural prudence—to be more precise, any failure to document procedural prudence—on any material aspect of plan management and administration will put fiduciaries at increased risk on claims challenging higher fees, and any ex post subpar investment performance.

But there are powerful defenses available. Although the recent fee-litigation rulings put substantial pressure on fiduciary practices, they also provide teachings identifying areas of potential exposure, and of fiduciary practices that can lessen that exposure. Documented prudent processes addressing the issues that have created risk (for example, recordkeeping fees and the relative costs of comparable funds) will provide powerful defenses to any fee claim.

_{[1] Tussey v. ABB, Inc., No. 2:06–cv–04305–NKL, slip op. at 17 (W.D. Mo. Dec. 9, 2015), ECF No. 782.}

_{[2] Joint Motion for Preliminary Approval of Class Settlement, Kruger v. Novant Health, Inc., No. 1:14-cv-00208 (M.D.N.C. Nov. 9, 2015), ECF No. 43; Joint Motion for Preliminary Approval of Class Settlement and Plaintiff's Memorandum in Support of Joint Motion, Spano v. Boeing Co., No. 06-cv-743-NJR-DGW (S.D. Ill. Nov. 5, 2015), ECF Nos. 554 and 555.}

_{[3] Haddock v. Nationwide Fin. Servs., Inc., No. 3:01-cv-1552 (SRU), slip op. at 1-2, ECF No. 526 (D. Conn. Apr. 9, 2015).}

_{[4] Krueger v. Ameriprise Fin. Inc., No. 11-cv-2781, slip op. at 1-2 (D. Minn. July 13, 2015), ECF No. 623.}

_{[5] Tatum v. RJR Pension Inv. Comm., 761 F.3d 346, 365-66 (4th Cir. 2014).}

_{[6] 135 S.Ct. 1823, 1828-29 (2015). In Tibble, the selection of retail instead of institutional share classes, as well as the timing of that decision, came under fire. Issues remaining for trial included whether the inclusion of retail class shares was imprudent. Plaintiffs claimed that the defendants breached their duty of prudence when they invested in the retail share classes rather than the institutional share classes offered by several of the mutual funds. Following trial, the evidence showed that: At the time of the initial investment decision, both retail and institutional share classes were available, with the only difference being that the retail share classes charged higher fees; the district court concluded that the evidence presented at trial established that the defendants never considered or evaluated the different share classes for these funds, and that if they had requested the institutional share class, because of the size of the plan, they likely would have received that class. The district court found that this failure to investigate acquiring the institutional share class was a breach of fiduciary duty of prudence, but found the claims were time-barred for the funds added more than six years before the lawsuit was filed.}

_{[7] Tussey v. ABB, Inc., 746 F.3d 327, 337-41(8th Cir. 2014). In December 2015, on remand, the district court awarded $11.6 million in attorneys' fees. Tussey v. ABB, Inc., No. 2:06-cv-04305-NKL, slip op. at 17 (W.D. Mo. Dec. 9, 2015), ECF No. 782.}

_{[8] Tussey v. ABB, Inc., No. 2:06-CV-04305, 2012 WL 1113291, *39-40 (W.D. Mo. Mar. 31, 2012).}

_{[9]  See, e.g., Hecker, 556 F.3d at 586.}

_{[10] 556 F.3d 575, 581 (7th Cir. 2009).}

_{[11] Loomis v. Exelon Corp., 658 F.3d 667, 673-75 (7th Cir. 2011).}