Five Simple Ways to Reduce Your ERISA Lawsuit Risk

By Bob Herdoiza

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 both prevent and prepare for facing 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 alo fulfill an ERISA requirement to hire expertise if you do not possess it as a plan fiduciary. With the rise in lawsuits based on investment choices as opposed to plan management, working with a competent ERISA §3(21) or §3(38) fiduciary is worth its weight in gold.

At Stonebridge Financial Group, we work as ERISA §3(21) and §3(38) fiduciaries. With your plan’s best interests always at the forefront, we leverage our years of experience and industry knowledge to help you provide the best possible retirement plan for your employees. If you’re interested in learning more about our fiduciary services, schedule a free 15-minute introductory phone call today.

About Bob

Bob Herdoiza, AIF®, started his career as a CPA auditing retirement plans and is a Partner at Stonebridge Financial Group, a registered investment advisory firm. Stonebridge seeks to help clients build and manage highly effective, successful retirement plans. Bob also served as President of CEBOS for more than 15 years where he managed his company’s retirement plan before joining Stonebridge Financial Group. He takes pride in his firm’s 98% client satisfaction rate (according to a 2016 client survey) and individualized implementation approach. Learn more by connecting with Bob on LinkedIn or visiting