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Another ERISA Fiduciary Duty Settlement Highlights Need for Good Fiduciary Governance

Publications - Client Alert | May 23, 2018

Last week, Philips North America LLC (“Philips”) reached a settlement agreement with its 401(k) plan participants for $17,000,000 following a suit filed less than a week prior. Plan participants alleged Philips failed to follow the terms of its investment policy statement (“IPS”), negotiate lower expenses in the investment options offered, and offer a stable value fund. Fiduciaries of participant-directed retirement plans can learn some risk-mitigating lessons from the facts of this case.

Of particular significance in the Philips case was the plaintiffs’ focus on Philips’ IPS, which required periodic evaluation of each investment’s objectives and returns. The IPS set a goal for actively managed funds to outperform 50% of their peer group and outpace their benchmark. One of the actively managed funds in the Philips’ plan did not meet those goals for more than four years. Philips nevertheless kept this fund in the plan.

Philips uses Vanguard as its recordkeeper and uses primarily Vanguard funds. Vanguard is well known for providing low-cost services, including-low cost index funds. However, plaintiffs argued that even though Vanguard offers low fees, Philips failed to negotiate lower fees and request competitive bids for recordkeeping services for over 20 years.

Finally, the plaintiffs alleged that Philips was not prudent in failing to offer a stable value fund as an option in the plan. The complaint details a general discrepancy between the yield a money market fund and a stable value fund may obtain. Plaintiffs claimed a prudent fiduciary would consider a stable value fund as a capital preservation investment and Philips’ failure to do so resulted in an over $41,000,000 loss in retirement savings.

Per the settlement agreement, Philips will pay $17,000,000 toward plan participants’ monetary relief. A third of the settlement amount will go toward attorneys’ fees. Additional settlement terms include: conducting a request for proposals for recordkeeping services, notifying current plan participants of the risks and benefits of the plan’s money market fund option, and retaining an independent consultant to review the plan’s investment lineup and provide advice on a money market fund or stable value fund option, and to provide plaintiffs’ counsel with a list of the plan’s investment options and fees for three years.

Next Steps

Like all cases that settle early, this case does not provide a lot of information about the fiduciary’s process or what the court would have ultimately decided. However, a $17,000,000 settlement one week after the complaint was filed suggests some good reminders for fiduciaries:

  • An IPS should be treated as a legal document and reviewed regularly. If the IPS states that the fiduciary will take action if certain events occur, it is crucial that the fiduciaries take such action.
  • Meeting minutes explaining why a committee chose to act or not to act are a critical part of the fiduciary governance process.
  • Fiduciaries must benchmark all plan service providers. Adopting a process involving careful consideration of when the fiduciary will go out for competitive bids is a best practice.
  • Fiduciaries have an ongoing obligation to carefully consider what types of investments to include in a plan menu. A fiduciary should regularly revisit prior decisions on what investment will represent each asset class and consider investment vehicles not used by the plan that are commonly used by retirement plans of a similar size. 
Additional Information

If you would like assistance assessing the strength of your fiduciary governance process or if you would like to schedule training for your plan fiduciaries, please contact a member of our Employee Benefits Practice Group.