Advisors Have Mostly Been Absent in 401k Litigation; A Fresh Look at One Document Could Change That

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A rash of lawsuits in retirement plans continues to ravage the industry. It seems that a week can’t go by without some development like this littering the headlines of trade publications. While most of the suits have been leveled against plan sponsors, it seems the litigious eye has been looking for ways to crack other service providers. Advisors have dodged the bullet for the most part. But I think that could change, especially as suits work their way down market.

As lawsuits and settlements continue to file in, plan sponsors are beginning to sit up in their seats. Those that have had their turn in the barrel are looking for better ways to make sure they don’t end up back for a second turn. And those who have not been named are looking for ways to avoid even a first trip in front of a judge. While fiduciary processes continue to evolve, eliminating avenues for opportunistic legal counsel, there are still process shortcomings to be fixed.

Advisors have largely missed being implicated in most of these suits. However, it appears that the lawyers are busy looking for the next opportunity to exploit short comings in the fiduciary process. I see one such shortcoming that could drag advisors into the fray and potentially end up with suits filed against their firm.

At the crux of this issue are the 408(b)(2) and 404(a)(5) disclosures. Commonly referred to as fee disclosure documents, these disclosures list to the participant and the plan sponsor, respectively, the fees assessed by a covered service provider. Specifically in the plan sponsor version, the CSP articulates the services performed for the stated compensation. While their effects were much feared before their arrival in 2012, their impact on the market seemed relatively muted. But that could quickly change.

Here is the potential issue: How does a plan sponsor correctly assess that the services are being performed as outlined in the fee disclosure documents? Or how does the advisor’s compliance department confirm that their representative is performing the stated services? As we have mentioned in other blog posts (Duty to Monitor), plan sponsors absolutely have a duty to monitor activities associated with plan operation. And monitoring is worthless if you can’t prove that the monitoring happened, especially should you find yourself in a court of law. As we prepare for the DOL’s Fiduciary Rule to be made public, it is important to note that advisors face increased legal liability under the rule as proposed.

The suits under the scenario above could be pretty ugly. The original suit, as I see it, would be a breach of fiduciary responsibility for the responsible plan fiduciary failing to insure reasonableness of fees. They paid for services that they did not receive, for example. This could include engaging in a prohibited transaction by paying for services with plan assets. A secondary suit, filed by the plan sponsor, could be leveled against the advisor for failing to deliver on stated services as outlined in the 404(a)(5) Fee Disclosure and for, potentially, causing the plan sponsor to engage in a prohibited transaction.

However ugly the problem may seem, the solution is pretty simple. By employing a system that tracks activity of a CSP and services stated in the 404(a)(5) disclosure, a responsible plan fiduciary can efficiently display that they have monitored and documented that a CSP has delivered the stated services for which they have been compensated. Additionally, a compliance department can use the system to monitor that the services to which their representative has committed have actually been performed. A continual monitoring process of this nature, while more time consuming than a year end sign off, also affords the CSP the opportunity to rectify potential lapses before they become issues.

It is imperative that broker dealers, registered investment advisors, and their representatives take action now to implement policies to insulate themselves from potential future litigation resulting from services promised but never delivered. If you employ a 3(16) Fiduciary to monitor covered service providers, it is worth asking him how he intends to address this potential issue. Lawsuits of this nature are a black eye that the retirement plan industry cannot afford. I believe that a vast majority of the advisors out there are performing their duties appropriately. However, we all know that it only takes one case for a feeding frenzy to start. As always, if you need help, reach out to me (

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