Compensation Governance Is Often Ignored.

The best practices of corporate governance and compensation governance are well developed and understood by company boards and management.

In contrast, the proper structures for benefits governance are generally unfamiliar and developing through frequent legislative changes and fiduciary class action litigation.

There are several reasons for this:

  • First, employee benefits law is multidisciplinary and technical, incorporating aspects of tax and general corporate and securities regulations, and specialized benefit rules like the Employee Retirement Income Security Act (ERISA), but relatively few companies are advised by counsel that understands each piece of that puzzle.
  • Second, boards generally leave employee benefits to the purview of management, specifically HR, believing these programs present immaterial risks to their executives and the business. Yet ERISA is modeled on the law of trusts and therefore imposes some of the most rigorous and expansive fiduciary conduct standards in U.S. law. Relatively successful benefit plans still face reputational and financial risk from litigation.
  • Third, management’s risk function often believes its third-party recordkeeper automatically protects the company from plan failures (e.g., by managing operations or via a contractual indemnity) when those vendors usually disclaim responsibility for key risk areas. This creates a gap where management is not devoting adequate attention to benefits risk despite the substantial assets involved and a near-record number of fiduciary class actions filed in recent years.

This article explores the legal landscape for benefits governance and mitigation techniques for boards.

What is the law?

Spurred by the widely publicized 1963 failure of the Studebaker pension plan, Congress enacted ERISA in 1974 to impose burdensome fiduciary and compliance requirements on benefit plan sponsors.

ERISA applies beyond traditional pension plans, covering any “employee benefit plan,” including 401(k) retirement plans and health benefit plans, and imposes fiduciary requirements on anyone exercising discretionary authority over plan assets or plan administration. These fiduciaries are required to act prudently and solely for the benefit of participants. While ERISA allows employers to make plan design decisions in a non-fiduciary “plan settlor” capacity, most of the consequential decisions involving management of an employee benefit plan come with fiduciary responsibility and risk.

Sponsoring companies are also required to abide by a plethora of technical compliance rules related to plan communications, plan design, tax treatment, document requirements, prohibited transactions and governmental filings, to name a few.

Failure to abide by these fiduciary and compliance rules creates liability not only from federal agencies like the Department of Labor and IRS, but from an active community of plaintiffs’ attorneys who bring class actions on behalf of injured plaintiffs. These “401(k) class action trolls” can recover their fees from offending fiduciaries, and therefore actively invent new “gotcha” theories of fiduciary liability, research plans to sue and recruit plan participants to serve as class action plaintiffs.

Such litigation is also increasing. Encore Fiduciary, a fiduciary insurer, noted a near-record 155 fiduciary class actions filed in 2025, and Bloomberg reports that plaintiffs filed 68 fiduciary actions in Q1 of 2026 alone, more than the combined Q1 filings from 2024 and 2025.

These class actions are not limited to low-quality plans, but include name-brand companies with large plans—targeted precisely because of their size and relative exposure. For example, Wells Fargo, JPMorgan Chase, Ford Motor Co., UnitedHealth, and Charter Communications all faced lawsuits over their industry-standard practices with respect to the use of plan forfeiture assets.

Unique Liability Mitigation Structures and Processes

Notwithstanding these risks, employee benefits are perceived as a commodity and easy to overlook, resulting in hidden and excessive fees, lackluster investment returns and poor claims procedures that open the door for litigation or federal enforcement.

Instead, we recommend boards adopt a structure that allocates fiduciary responsibility first to expert vendors acting under management oversight. For a 401(k) plan, this would mean:

  • The plan document should establish an Administrative Committee and an Investment Committee, consisting of members of management from HR, legal and finance whose job duties already include employee benefits.
  • The Investment Committee is responsible for appointing a Named Investment Fiduciary who will be the party with exclusive authority over plan investments and investment fees. That Named Investment Fiduciary should be a competent third-party investment manager who has contractually obligated itself to function as the plan’s sole investment fiduciary.
  • The Administrative Committee is the named fiduciary with exclusive authority over plan administration and interpretation, empowered to delegate these functions to an appropriate vendor, like the plan’s recordkeeper.
  • The recordkeeper should contractually agree to fiduciary authority over routine plan administration and claims review, and indemnify the employer for the recordkeeper’s own negligence.
  • Each of these committees should be governed by a charter that specifies the committee’s duties, states the frequency of meetings, and provides that minutes will be kept by outside benefits counsel.
  • This structure empowers effective internal committees to oversee plan governance without direct board involvement while insulating those committees from front-line fiduciary exposure for investment performance, excessive fees or poor claims reviews so long as those committees properly monitor the responsible third-party named fiduciaries.

That remaining “monitoring” risk can then be further mitigated by retaining outside benefits counsel to manage the quarterly meetings, prepare sound minutes, assist with operational and administrative questions, and manage periodic requests for review or requests for proposals for retention of third-party named fiduciaries.

This governance structure tracks the above-mentioned distinction in ERISA between “plan settlor” and “plan fiduciary” functions. Congress knew that no employer would adopt a retirement plan if every act was fiduciary in nature, so it allowed employers to act in their own interest and free of fiduciary obligations when making decisions about plan design as a “plan settlor” – such as adopting a plan document or optional plan feature.

So, when the board of directors approves a plan document that adopts the above design (providing that the named fiduciaries are solely responsible for investment and administrative decisions and that the committees’ only fiduciary function is to decide whether to retain named fiduciaries) it is arguably acting as a plan settlor and not as a fiduciary.

This approach elegantly puts responsibilities where they belong: with the named fiduciaries who are experts in their field and with the committees, who are experts in selecting vendors to make fiduciary decisions.