In April 2018 The Home Depot was sued in a fiduciary liability action where plaintiffs alleged that the company placed the employees 401k retirement plan in poorly performing funds and where they overpaid for investment advice.Â Plaintiffs are seeking $140 million in damages.
The class action complaint represents nearly 200,000 current and former plan participants and was filed against The Home Depot, the 401k planâ€™s investment and administrative committees, and investment advisors from two different firms.Â The complaint alleges two major violations against the defendants:
- Violation of their basic ERISA fiduciary duties
- Abuse of their employeeâ€™s trust through the mismanagement of the retirement plans.
An outside independent advisor has concluded that the average plan participant could have about $100k less in their retirement plan that an employee in a similar situation with a lower cost/fee plan.
While this is a spectacularly large case involving thousands of employees and millions of dollars in potential damages, letâ€™s take a step back and look at this through the prism of a smaller middle market firm.Â Letâ€™s say you own a manufacturing firm with 500 employees and have a 401k plan for the employees retirement benefit.Â You purchased this plan and maintain a relationship with your corporate financial advisor who works for a big name investment or life insurance company and trust that they are doing the right thing.Â But you may not look for second opinions on the plan because you think itâ€™s just an unnecessary hassle.Â Youâ€™re busy running your company, and the company 401k plan may not be on the top of your priority list, so it just goes along year after year without analysis.
Then one day a smart employee starts asking questions about the plan documents, or the internal fees they pay for the funds where theyâ€™re invested.Â Maybe that employee read a news article about this Home Depot problem and started to wonder if their retirement plan had the same sort of issues?Â Or, maybe that employee was new and had been burned by bad investment advice in the past and decided to be more informed.
However the questions start, the plan trustees are obligated to provide participants the information about the plans they are invested in.Â Could your plan stand up to scrutiny?
This is a question that most plan trustees and employers donâ€™t ask themselves.Â Probably because they believe they are doing the right thing by hiring a brand name advisor or fund manager, or they trust the advisor who sold them the plan.Â But what trustees who are often the owners of the company donâ€™t realize is that the potential liability they face for inaction is significant and can strike through to them personally â€“ yes, the ownerâ€™s personal assets are at risk when a fiduciary claim arises.Â Whatâ€™s even more troubling is that many employers think that their general business policies may cover this risk but they donâ€™tÂ Â Even the employee benefit liability extension commonly found on the general Â liability policy will not respond to a claim of this nature.
What your firm needs to protect itself and the trustees of your plan is Fiduciary Liability Insurance.Â Fiduciary protection can be purchased as part of a management liability policy (D&O, EPLI, etc.) and is typically just a small up-charge to that policy form if youâ€™re already buying Employment Practices or D&O.Â If youâ€™re not currently purchasing any form of management/executive protection then starting from scratch and pricing out different coverage parts including Fiduciary would make sense.
Want more information on management liability, including fiduciary liability?Â Drop me an email, or give me a call, and letâ€™s start a conversation!