Much has been written about the Supreme Court’s recent decision in the LaRue case. Some commentators have concluded that it will unleash a tidal wave of litigation against plan fiduciaries, while others have reached the opposite conclusion. I tend to agree with the latter group. My belief is that there will not be a tidal wave of litigation .... because there is not a tidal wave of fiduciary breaches. It’s like the old song “Love and Marriage, Horse and Carriage” ... you can’t have one without the other.
However, that does not mean that there are not serious fiduciary issues and reasons for concern. Of course there are. But, those concerns can be dealt with in a litigation free environment. In other words, the LaRue case should heighten fiduciary compliance, not litigation.
In that context, the LaRue decision is a “friend” for competent advisers whose practices are focused on 401(k) plans. That is because the use of a competent, non-conflicted adviser is material evidence that fiduciaries have engaged in a prudent process.
In a nutshell, the first lesson from LaRue is that fiduciaries should work with advisers who are competent and focused on 401(k) plans. As a part of that, fiduciaries should have regular meetings with their adviser. The adviser should provide the fiduciary (for example, the plan committee) with reports and information to review prior to the meeting and then should go over those reports and answer questions posed by the fiduciaries. The reports should cover all aspects of plan operation, including investments, participant investing practices, participation, deferral rates and, yes, fees and expenses—including the fees that are paid, both directly and indirectly, to the adviser.
If the fiduciaries are attentive to that process, then the use of an adviser and the review of the reports are substantial evidence of both substantive and procedural prudence. The fiduciaries’ job is to review and understand the information, ask questions of the adviser, and reach and implement reasoned decisions.
There is another significant lesson from LaRue, though. That is that fiduciaries should not allow plans to enter into agreements with providers that imprudently give away valuable participant rights. For example, if a provider makes a mistake in implementing a participant-directed investment, will the provider agree to be financially responsible for that mistake? Or, does the recordkeeping agreement effectively give away the protection that the participant should have. There is no approach that is right in all circumstances. Instead, the fiduciaries need to evaluate all of the provisions in the agreements that limit the liability of the service providers. Then, they need to determine whether it is reasonable and prudent to accept provisions that limit the liability of the service provider (and thereby give up the right of the plan to protect itself and the participants).
An adviser who is focused on 401(k) plans can help plan sponsors evaluate those agreements and provide fiduciaries with information about whether the agreements provisions are standard in the industry or unduly restrictive. Of course, they should also be reviewed by attorneys.
To my mind, those are the primary lessons from LaRue. There may be others, but these are important ones. Keep them in mind.
Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.