Participants in Vanderbilt University Medical Center’s retirement plan have filed a proposed class action under the Employee Retirement Income Security Act (ERISA). The participants allege that Vanderbilt violated its fiduciary duties under ERISA in the management and performance of the retirement plan.
ERISA outlines strict fiduciary standards for those who manage retirement plan assets. Plan managers must act solely in the interests of plan participants and beneficiaries to provide them with plan benefits and defray reasonable plan administration expenses. Managers also have a duty to diversify plan investments to mitigate the potential for large losses. Although managers cannot guarantee certain results for plan participants, they must use a prudent decision-making process to manage investments. However, consistent investment underperformance, excessive fees, revenue-sharing agreements with recordkeepers, and proprietary investment options all can constitute evidence of poor management.
Like other ERISA class action cases, the Vanderbilt case likely will proceed through months of procedural stages before the court determines the merits of the claims. Plan participants typically file a motion for class certification asserting that their case meets the requirements for certification under the Federal Rules of Civil Procedure. Vanderbilt is likely to move to dismiss the claim for failure to state a claim upon which relief can be granted. Dismissal at this stage is unlikely, but not impossible, as shown by the recent dismissal of similar claims against 3M Company for failing to identify meaningful benchmarks for the proprietary custom target-date funds that plan participants challenged.
Vanderbilt is likely to argue that it followed a prudent decision-making process in selecting and monitoring its investments, thereby fulfilling its duties under ERISA. Evidence such as regular investment committee meetings, fund review processes, and independent investment consultants could bolster this defense. As in the 3M case, Vanderbilt also could claim that the plan participants have failed to identify appropriate comparators to evaluate plan fund performance.
The pending Vanderbilt case emphasizes the need for large institutional retirement plans, especially those affiliated with universities and medical centers, to document their processes in selecting and monitoring investment funds. Plans should conduct regular reviews of plan investment options, using appropriate benchmarks for performance comparisons and fee benchmarks. Plans should also maintain a competitive bidding process for recordkeeping and administrative services to keep fees reasonable. Carefully documenting investment committee meetings creates records that demonstrate attention to fiduciary responsibilities. Using independent investment consultants and providing clear disclosure of fees and investment options can also help satisfy fiduciary responsibilities.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
