This content is from: Corner Office

Fear of Litigation Looms Over DC Plans

Investment fees and plan costs are a top concern for defined contribution plan sponsors, according to PIMCO’s annual consultant survey.

  • Staff

In a list of the most important factors driving decision-making at defined contribution plans, litigation risk ranked second only to meeting participant retirement goals.

A quarter of DC consultants surveyed by PIMCO rated avoiding fiduciary lawsuits as the most important consideration of their clients, compared with 29 percent who chose retirement outcomes.

Of these consultants, who collectively advise on more than $4 trillion in DC assets, 84 percent recommended that clients compare plan costs with those of peers as one way to manage fiduciary risk. Another 55 percent said plan sponsors should avoid funds that charge performance fees.

Evaluation of fees and costs is expected to be a top priority for defined contribution plans this year. Consultants ranked studies of investment fees, plan costs, and administration fees among their top four client priorities; reviewing target-date funds, which the retirement plans of Wells Fargo and Safeway were each sued over last year after participants said funds were too expensive, ranked first.

The consultants have reason to be concerned over potential litigation. In recent years, DC plan sponsors including Intel, Boeing, and MassMutual have been sued for reasons ranging from hedge fund allocations to lack of transparency to fees. Even university 403(b) plans have become the target of litigation, with a slew of top schools including Duke, Vanderbilt, and Yale sued late last summer for failing to uphold their fiduciary duty.

In any case, target-date funds remain by far the most popular fund structure for DC participants, with 97 percent of consultants recommending them as the default option for employees.

Stacy Schaus, the PIMCO executive who authored the survey, said in a statement that nearly all consultants cited target date glide paths — a fund’s changing mix of investments over time — as the most important factor in choosing a default investment strategy.

“Consultants also note fees as an important consideration, which helps explain broad support for active and passive-blend target-date strategies,” she added.

As for addressing their legal fears, some plan sponsors have found comfort in outsourcing responsibilities to consultants, according to PIMCO. Currently, consultants said 12 percent of their clients used discretionary services, a number they expected to grow to 18 percent over the next three years. Perceived mitigation of fiduciary risk ranked as the highest motivation for using an outsourced-CIO, chosen by 85 percent of survey respondents.

But even the OCIO model isn’t a safe haven from lawsuits: 52 percent of consultants said litigation risk was the highest hurdle to growing their discretionary services.