With the extreme rise in ERISA lawsuits has also come a rise in insurance premiums. One insurer shared their tips for plan sponsors to mitigate the risk of a lawsuit.
Not surprisingly, many of these tips center around a documented, prudent process. It is not a fiduciary’s duty to always have the cheapest and best performing funds in a lineup. Such an expectation is unreasonable and has been dismissed by the courts, who agree that prudence is not outcome-based, but rather process based (see Martin v. CareerBuilder, LLC).
But when will more courts begin to dismiss weak claims that provide no plausible evidence of a breach beyond the existence of a cheaper or a better performing fund?
DALBAR’s historical analysis has found that replacing a fund with strong leading indicators for a better performing fund is not prudent because one cannot expect the performance of an investment or asset class to persist (see “Why Returns Can’t be Evidence of a Fiduciary Breach”).
Instead, when considering investments, fiduciaries should focus on factors that are generally considered to be superior to past performance as predictors of investment returns. Documenting these factors as being the reason for the investment’s inclusion in the lineup will go along way in defeating meritless claims that use underperformance in hindsight as evidence of a fiduciary breach.