As a survey by Pacific Investment Management Co. earlier this year revealed, defined contribution plan executives see litigation risk as a major concern. In the survey, 64% of executives listed managing litigation risk and meeting participants' retirement goals as first- or second-most important.
The concern about litigation is not surprising, given the many lawsuits brought against fiduciaries by beneficiaries of defined contribution plans. Some plaintiffs have won their suits, and some fiduciaries have won, but even defending against a lawsuit can be expensive and distracting.
The prospects of lawsuits might be troubling to plan executives who are fiduciaries, but they have served two useful purposes.
First, the court decisions, have delineated the boundaries of fiduciary behavior in ways that laws and regulations cannot, defining what fiduciaries must do to satisfy their obligations to the beneficiaries.
Some cases allege the fiduciaries caused their plans to pay unreasonable fees by failing to take account of revenue sharing from mutual fund companies to record keepers and other service providers. Others allege the fiduciaries offered actively managed mutual funds instead of cheaper index funds. Others focus on the choice of retail-class mutual fund shares when institutional-class shares were available.
Other suits have alleged that fiduciaries breached their duties by selecting mutual funds affiliated with the plan sponsor as the plan's investment options. Some cases allege fiduciaries chose expensive or poorly performing funds to benefit the employer or its affiliates.
Rulings have generally depended on the process fiduciaries used to select mutual funds, the range of mutual funds offered, fees compared with other options, and the ability of the plaintiffs to show harm.
The second benefit is how the court cases have focused the attention of DC plan fiduciaries on their key duty: To make all decisions solely in the interests of the beneficiaries, and to make them through a well-thought-out process.
Plan sponsors who dropped defined benefit plans and replaced them with defined contribution plans have passed the investment risk off to their employees, but they have taken upon their shoulders a more complex fiduciary responsibility.