Recordkeeping Requirements and the Courts: Plan Sponsors May Face Scrutiny on Their Recordkeeper

Not too long ago the lawsuit pending against Anthem was settled for a remarkable $23.6 million figure. And while that amount may give plan sponsors pause, several other aspects of the case are worth noting. Here’s a deep dive into several parts of the lawsuit and settlement that can help plan sponsors review their own compliance and recordkeeping, and add some themes into their current risk management analysis.
‍

To get the takeaways from this case, it’s best to start with the details of the case. In late 2015, Anthem, a health insurer, was sued on the theory that plan fiduciaries chose a higher costing Vanguard mutual fund when Anthem could have made the same investments available at a lower cost to plan participants.  Plaintiffs also alleged that the plan fiduciaries allowed unreasonable expenses to be charged for administration costs, a total of $18 million in fees and losses as alleged. The plan had more than $5 billion in assets, but chose funds where alternatives with lower basis point fees were available.  
‍

A big takeaway from this case is the company it keeps. Other, similar cases have been filed against Boeing and Lockheed Martin. And these cases are strengthened by a recent Supreme Court decision holding that fiduciaries of retirement plans have an ongoing duty to monitor investments as well as fees. Anthem was unusual in that it focused on passively managed index funds.  Those funds are often thought of by plan sponsors as a safe choice.
‍

Another key aspect of the case involves the recordkeeping fees. Plaintiffs complained that the plan didn’t negotiate the recordkeeping fees to be a fixed amount per participant, instead of being charged as a percentage of plan assets. Some analysts say that this point is crucial. Fiduciaries now need to keep an eye on how fees are accruing and make sure that whether they are per capita by participant or percentage of funds under management, the plan sponsor may be tasked with continuing to seek the lowest costs.  Exactly how often is still not clear, though some analysts do still point to a three year cycle. Similarly, exactly how the recordkeeping custodian is found is also unclear. Some point to using a request for proposal (RFP) process, and others say that the process itself is the key – so long as a prudent process is used to benchmark the fees.
‍

As to the advisors and recordkeepers involved, one attorney recommended that “when selecting professional advisors, plan committees are well served by… working with advisors who work with other plans of similar size in assets and participants, and by checking references at those other similar plans.” This means, as your company grows and your plan grows along with it, you may need to change or grow your advisors as well. Keep in mind the Department of Labor’s Blackout period required prior to changing record keepers. As the DOL stated, a blackout period is usually 30 days (but not more than 60 days’) during which “participants …cannot direct investments, take loans, or request distributions.” Planning a change in recordkeepers to avoid times when participants may be most likely to change investment strategies may be helpful.
‍

When it comes to records, the IRS recommends that plan sponsors of 401(k)’s keep“plan document(s), adoption agreement (if you have one) and all plan amendments, as well as trust records such as investment statements, balance sheets, and income statements, participant records such as census data, account balances, contributions  and earnings, loan documents and information, compensation data and participant statements and notices.” That long of a laundry list should also be considered by plan sponsors in updating their recordkeeping plans.

‍