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Trouble on the horizon for US DC and 401k pension plan sponsors?

Updated: Feb 15

Employers, as sponsors of employee DC, 401k, and other types of pension programs, have fiduciary roles and responsibilities to the plan members and must act in the member's best interests. A recent Supreme Court decision (Hughes vs. Northwestern University) in the US will have a major impact on the level of care required of sponsors and will likely result in an increase in pension-related class action suits in the USA.


The plaintiffs, in this case, alleged poor management of the university pension plan including 1) fees for record-keeping were not properly controlled,

2) the investment options in the plan were not appropriate, and

3)too many investment options were available to the plan members.


A previous Supreme Court decision (Tibble vs. Edison International) also addressed the question of what constituted ‘prudence’ regarding ” … the continuing duty to remove imprudent one (investment options)” and ruled that the sponsor (fiduciary) had failed with respect to certain funds.


The key issues in question were related to the sponsor's “continuing duty … which includes monitoring investments and improving imprudent ones “. In addition, fiduciaries are derelict if “ they fail to remove an imprudent investment from a plan within a reasonable time”

In Hughes vs. Northwest University the Court addressed the prudence issue and the duties of judiciaries:

1) A broad choice of investment options does not insulate the sponsor from fiduciary liability.

2) Imprudent investments must be removed within a reasonable time period.

3) There is a duty to monitor and update plan (investment) options.

4) Monitoring fees is part of the fiduciary responsibilities.

5) Adherence to a plan document and a governance process

6) Use of recordkeeper proprietary investment products


CAPs were initially promoted as being less costly and risky however, sponsors will be forced to incur higher administration costs and devote more resources to overseeing the plans to avoid legal problems.


Smaller plans are often at risk because they are not aware of their fiduciary role and responsibilities nor do they have the resources and time needed to oversee a plan. Following industry ‘best practices’ may not be sufficient to avoid legal problems.

In addition to increasing sponsors' fiduciary risks, the demands and risks for advisors who are hired to assist sponsors in overseeing plan governance and investments will also be greater.


G.Wahl, Managing Director, The PensionAdvisor

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