Five Simple Ways to Reduce Your ERISA Lawsuit Risk

The rise in ERISA litigation over the last couple of years has many plan sponsors worried. Plan sponsors are now in a position where they have to carefully navigate around unhappy employees fueled by overzealous lawyers and increased DOL plan reviews.

While the idea of a lawsuit may be intimidating, there are things that every plan sponsor can and should do to reduce exposure to litigation. Here are five things you can do to prevent a lawsuit:

1. Develop and Document a Fiduciary Process

Often times, the claims that are filed aren’t in regard to blatant violations of the law. More likely, they question motivations, how decisions were made, and the priorities that were applied to arrive at the decisions.

In court, you will be called upon to defend your actions. Having an established and well-documented process that is consistently followed will be your only way of disproving the claims. It is easy to misunderstand actions and decisions, but having everything clearly documented will enable you to withstand the scrutiny and clear your company of any allegations of wrongdoing.

2. Purchase Fiduciary Liability Insurance

Fiduciary liability insurance can either be issued to the plan itself or the employer who sponsors the plan. It protects the insured from claims of breach of fiduciary duty or mistakes in the administration of the plan.

Though, as “third-party” insurance, it is only applicable when someone makes a claim against the plan, and not when the administrators discover a problem on their own. Some fiduciary liability policies also offer optional coverage for bringing a plan into compliance without a claim being filed.

Because every policy has different terms, conditions, limitations, and definitions, it is necessary to fully understand what is covered and what is excluded in each plan. Also, you need to know which individuals are covered. Even if they are ERISA fiduciaries, most outside parties, such as third-party administrators, are not covered.

3. Understand and Monitor Fees

Fees paid for 401(k) plan services are a common impetus for ERISA litigation. Allegations of wrongdoing range from not investing in the most cost-effective share class to not understanding the plan’s fee breakdown or how it compares to competitors. All of these claims represent a breach of fiduciary duty.

It is vital to protect yourself against claims such as these by monitoring fees and comparing them to proper benchmarks on a regular basis. You also need to understand how fees are paid and any indirect compensation that plan service providers receive in connection with the plan. A thorough understanding and regular scrutiny of plan fees will make great strides in reducing your lawsuit risk here.

4. Be Careful with Company Stock

Offering company stock as an investment option in your retirement plan increases your risk of litigation. The only way to completely remove this risk is exclude offering company stock as an investment option in the investment line up. However, many companies find that the benefits of offering company stock, such as increased participation and savings rates, outweigh the risks involved.

What can you do to protect yourself? First of all, clearly spell details of this investment option in the plan documents or investment policy statement. Just that simple step can make a huge difference. Does the company intend to invest the stock fund exclusively in company stock? The plan documents need to say so.

Also, plan fiduciaries should regularly monitor the company’s stock. Develop a standard by which to consistently monitor the stock and include it in the plan documents or investment policy statement. Regularly review information made available to the public as a part of the process and, of course, document everything.

5. Work With an Advisor Who Will Take on Fiduciary Status

You can actually reduce your fiduciary liability by delegating some of it to others. There are three kinds of fiduciaries you can delegate to under ERISA, all of which result in lowering your risk as the plan sponsor. However, not everyone that works with your plan takes on fiduciary status.

It is wise to hire an ERISA §3(21) or §3(38) fiduciary for investment advice or investment decision-making, to not only reduce your exposure, but to also fulfill an ERISA requirement to hire expertise if you do not possess it as a plan fiduciary. With the rise in lawsuits based on a multitude of reasons stemming from excessive fees to monitoring service providers and everything inbetween, working with a competent ERISA §3(21) or §3(38) advisor offers an additional layer of risk mitigation.

How We Can Help

Delegating fiduciary responsibilities to minimize your exposure can be a great solution for plan sponsors who lack time and the knowledge of ever-changing requirements to manage a retirement plan. At Stonebridge Financial Group, this is all we've done since our inception back in 2004! Our robust service offering starts with ERISA 3(21) and 3(38) services and is the tip of the iceberg. We are consultants that help you with every aspect of your plan:

  • Ensuring participant retirement readiness
  • 1:1 and group participant education and retirement readiness meetings
  • Financial wellness
  • Committee fiduciary training
  • Process creation and documentation
  • Plan design
  • Contribution match modeling
  • Annual plan compliance review
  • And so much more

We become your outsourced retirement plan officer who dives into the morass of retirement plan details and resolves issues so you don't have to!

Please click here to schedule a short call, give us a call at (855) 530-0500 x601 or email We look forward to helping your committee successfully fulfill their fiduciary duties with ease and excellence!