Best Practices for Plan Sponsors #12

Lessons Learned from Litigation (#5)—The Johns Hopkins Case

This is the twelfth in a series of articles about Best Practices for Plan Sponsors. To be clear, “best practices” are not the same as legal requirements. Instead, they are about better ways to manage retirement plans. In many cases, though, “best practices” also are good risk management tools because they should exceed legal standards, address areas of concern, or anticipate future developments as retirement plans and expectations evolve.

Plan sponsors should be aware of the latest trends in fiduciary litigation to help manage the risk of being sued and, if sued, the risk of being liable. In my past four plan sponsor posts, Best Practices for Plan Sponsors #8, #9, #10 and #11, I discussed the lessons learned from the conditions in the settlement agreements for the Anthem, Vanderbilt, BB&T and ABB cases. This article—about the Johns Hopkins settlement agreement—is another example of the importance of using appropriate share classes and the monitoring of compensation of service providers . . . and more.

The Johns Hopkins University settled the case for $14 million. The plaintiffs’ attorneys—the Schlichter Bogard & Denton law firm–received one-third of that amount, $4,666,667. But, as with the other settlements in this series—and as is typical of recent settlements with the Schlichter firm, there were non-monetary conditions in the agreement. Those conditions are the “lessons” for plan fiduciaries (e.g., plan committee members).

Before discussing those conditions, though, I should point out that this is from a settlement agreement. It’s not a court decision. So the conditions aren’t necessarily what the law requires. And the settlement isn’t an admission of wrongdoing. It’s a resolution of a lawsuit by agreement.

The first condition is that the plan fiduciaries must:

“. . . retain an independent consultant with expertise in designing investment structures for large defined contribution plans who will thereafter assist the fiduciaries in reviewing the Plan’s existing investment structure…and develop a recommendation for the Plan’s investment structure. . . If the fiduciaries do not follow the consultant’s recommendation, they will document the reasons for that decision and provide those reasons in writing to Plaintiffs’ counsel along with the consultant’s written report(s), if any, and other documentation reflecting the consultant’s recommendation and basis for such recommendation; . . .”


Comment: The requirement to use an independent investment consultant appears in a number of the settlements. But, it’s a bit of a surprise that some large plans don’t already have independent consultants. Where plans have used qualified consultants (and followed their advice), the fiduciaries have fared much better in ERISA lawsuits. In this case, the “enforcement” mechanism—from the perspective of the plaintiffs’ attorneys, is the requirement that, if the fiduciaries do not follow the advice of the consultant, that must be reported to the plaintiffs’ attorneys.

The second condition is that:

“With the assistance of the independent consultant (described above), the Plan’s fiduciaries (or a delegate thereof) shall issue requests for proposals for recordkeeping and administrative services . . . After conducting the request for proposal for recordkeeping services, the independent consultant shall provide a recommendation to the Plan’s fiduciaries regarding whether the Plan should use a single recordkeeper or more than one recordkeeper. To the extent the Plan’s fiduciaries decide not to follow a recommendation, the Plan’s fiduciaries shall document the reasons for that decision and provide those reasons in writing to Plaintiffs’ counsel along with the consultant’s written report(s), if any, or other documentation reflecting the consultant’s recommendation and basis for such recommendation; . . .”

Comment: These cases usually involve claims that the recordkeeper has been overpaid for its services. Since ERISA prohibits fiduciaries from paying more than reasonable amounts for services and investments, the damages, if any, would be the amount by which the total compensation of the recordkeeper, direct and indirect, exceeded a reasonable amount. The determination of a reasonable amount can be based on data about industry fees for similar services to similar plans. That data can be obtained through a number of means, e.g., RFPs or benchmarking services.

The requests for proposal shall request that any proposal provided by a service provider for basic recordkeeping services to the Plan include an agreement that the service provider will not solicit current Plan participants for the purpose of cross-selling proprietary non-Plan products and services, including, but not limited to, Individual Retirement Accounts (IRAs), non-Plan managed account services, life or disability insurance, investment products, and wealth management services, unless a request is initiated by a Plan participant.


Comment: In both the Vanderbilt University settlement and this case, the Schlichter law firm negotiated prohibitions on solicitation of participants by the recordkeeper for non-plan services and products. This is a controversial provision because plan providers can offer financial wellness programs that help participants and that are, at least partially, financed through the fees for those ancillary products and services. In my opinion, a better approach would be for plan fiduciaries to allow those services to be provided, but only after they understand and evaluate the value that the services offer to participants and the protections from abuses.

During the Settlement Period, in considering Plan investment options, the Plan’s fiduciaries shall consider, among any other factors the Plan’s fiduciaries deem reasonable and appropriate under the circumstances, including the following: (1) the cost of different share classes available for any particular mutual fund considered for inclusion in the Plan as well as other criteria applicable to different share classes; and (2) the availability of revenue sharing rebates on any share class available for any investment option considered for inclusion in the Plan.


Comment: The drum beat continues on the selection of the lowest cost available share class. It appears that the plaintiffs’ attorneys are confident that they can win on that issue, e.g., that it is a breach of fiduciary duty to select a higher cost share class of a mutual fund where a lower-cost share class is available. However, the second point is a concession to that fact that, in some cases, if a higher cost share class pays revenue sharing, the “net” cost may be lower than the nominally lower cost share class.

Concluding Thoughts

Most of the class action ERISA lawsuits are primarily about plan costs—the cost of recordkeeping and the cost of the investments. But those lawsuits, or at least the liability for breaches, can be avoided by taking reasonable steps. The first step is for plans to use independent investment consultants who are focused on retirement plans and who have experience with similar plans (e.g., by industry and size). Those consultants can then guide plan committees through a prudent process for evaluating the investment and recordkeeping costs. While RFPs may be appropriate in some cases, they are an expensive and time-consuming process for regular monitoring. In those cases, a credible benchmarking service could be used.

The moral to the story is that fiduciaries aren’t required to know the in’s-and-out’s about retirement plans and service providers, and their costs, but fiduciaries are required to get the services they need to do their jobs.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.