Over
the past decade and change, there have been a number of high-profile
excessive fee suits brought against retirement plan fiduciaries, notably
the plan committees that oversee these programs. Here’s what your plan
committee members should know.
1. Why they are a member of the committee.
Today the process of putting together an investment or plan committee runs the gamut – everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary.
There is, or should be, a legitimate, articulatable reason why each and every member of your plan/investment committee was selected. They, and every other member of the committee, should know that reason. If you can’t articulate that reason (or can’t with a straight face), they shouldn’t be on the committee – for their own sake, and the sake of every other committee member.
Note also that, over time, committees have a tendency to expand, sometimes based more on factors like internal organizational politics than on valuable perspectives or expertise. But human dynamics are such that the larger the group, the more diffused (and sometimes deferred) the decision-making. So, it’s worth revisiting that articulatable reason – and making sure it’s still valid – on at least an annual basis.
2. That, as a member of the plan committee, each of them is probably a fiduciary.
Committee members often do their work in relative anonymity – or did before the recent spate of ERISA litigation. That said, in a recent excessive fee case (Sacerdote v. N.Y. Univ.), the court – while delivering a verdict for the plan fiduciaries – nonetheless called out several committee members who “…displayed a surprising lack of in-depth knowledge concerning the financial aspects of managing a multi-billion-dollar pension portfolio and a lack of true appreciation for the significance of her role as a fiduciary” – including, in one case, a member who “…did not consider herself a fiduciary (but rather believed the Committee was the fiduciary).”
In that case, a federal judge also stated that “the hiring or appointment of a co-fiduciary does not relieve the original fiduciary of its independent duties,” that “no fiduciary may passively rely on information provided by a co-fiduciary,” and that a “fiduciary who delegates fiduciary responsibilities nonetheless retains a duty to exercise prudence” – a process that she likened to a “good old-fashioned ‘kicking the tires’ of the appointed fiduciary’s work…”.
Their role on the committee may be bounded in by the focus of that group – a focus on the investment and investment menu, for example. That said, if they’re on a plan committee, and they are influencing plan assets, they’re a fiduciary, and they should not only know that, but know what that means.
Of course, fiduciary status is based on one’s responsibilities with
the plan, not a title. Simply stated, those who have discretion in
administering and managing the plan, or if you control the plan’s assets
(such as choosing the investment options or choosing the firm that
chooses those options), are fiduciaries to the extent of that discretion
or control – and that certainly includes committees that either make
decisions regarding the hiring or firing of plan fiduciaries, or those
that make decisions regarding the plan’s assets.
3. What being a plan fiduciary means.
Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. In addition to paying only reasonable plan expenses, these responsibilities include acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them, following the terms of plan documents, and carrying out their duties prudently. More precisely with the skill and aptitude of a person expert in such matters.
Even when the plan hires a professional investment advisor to help them – something that ERISA demands of plan fiduciaries when they lack the skill and knowledge of a prudent expert – in the NYU case above, the same judge pointed out that even then the committee could not “unthinkingly defer” to that advisor’s expertise. Rather, she said, in order to fulfill their duties, “…the Committee members must meaningfully probe” the advisor’s recommendations “and make informed but independent decisions.”
ERISA fiduciaries are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. What does that liability mean? Consider that, in the Enron case, the outside directors and committee members settled for about $100 million, most of which was paid by the fiduciary insurer. However, the individuals also had to pay approximately $1.5 million from their own pockets.
And since fiduciaries have potential liability for the actions of their co-fiduciaries, it’s also a good idea to… know who their co-fiduciaries are.
4. What’s in the plan’s Investment Policy Statement.
First, let’s acknowledge that the law doesn’t require that you have a written investment policy statement. Of course, if the law does not specifically require a written investment policy statement (IPS) – think of it as investment guidelines for the plan – ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And indeed, the vast majority of plans do have a written IPS – more than 90%, according to the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans.
More than that, generally speaking, you should find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.
5. What you’ll do to support them in this important duty.
Every plan, and every plan committee is unique. But the responsibility, and the prudent expert standard to which those responsibilities must be held has been called “the highest known to the law.” In forming and conducting the committee its imperative not only that the members be selected wisely, but that they be informed and engaged so that they can adequately and fully discharge those responsibilities.
One recent court decision (Wildman v. Am. Century Servs.) in favor of the plan committee defendants explains that the committee met regularly three times a year, and had “special meetings if something arose that needed to be discussed before the regularly scheduled meetings.” Moreover, the defendants testified that those meetings “were productive and lasted as long as was needed to fully address each issue on the agenda. On average, the meetings lasted an hour to an hour and a half.”
The plan provided “training and information about their fiduciary duties, including a ‘Fiduciary Toolkit,’ which outlined their duties as fiduciaries, as well as a summary plan document, and articles regarding fiduciary duties in general.” That kit included a copy of the current Investment Policy Statement, and the court noted that “the Committee members read these materials and took their responsibilities as fiduciaries seriously.”
And if your committee does that – well, then you’ll have the makings of a great plan committee.
- Nevin E. Adams, JD
1. Why they are a member of the committee.
Today the process of putting together an investment or plan committee runs the gamut – everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary.
There is, or should be, a legitimate, articulatable reason why each and every member of your plan/investment committee was selected. They, and every other member of the committee, should know that reason. If you can’t articulate that reason (or can’t with a straight face), they shouldn’t be on the committee – for their own sake, and the sake of every other committee member.
Note also that, over time, committees have a tendency to expand, sometimes based more on factors like internal organizational politics than on valuable perspectives or expertise. But human dynamics are such that the larger the group, the more diffused (and sometimes deferred) the decision-making. So, it’s worth revisiting that articulatable reason – and making sure it’s still valid – on at least an annual basis.
2. That, as a member of the plan committee, each of them is probably a fiduciary.
Committee members often do their work in relative anonymity – or did before the recent spate of ERISA litigation. That said, in a recent excessive fee case (Sacerdote v. N.Y. Univ.), the court – while delivering a verdict for the plan fiduciaries – nonetheless called out several committee members who “…displayed a surprising lack of in-depth knowledge concerning the financial aspects of managing a multi-billion-dollar pension portfolio and a lack of true appreciation for the significance of her role as a fiduciary” – including, in one case, a member who “…did not consider herself a fiduciary (but rather believed the Committee was the fiduciary).”
In that case, a federal judge also stated that “the hiring or appointment of a co-fiduciary does not relieve the original fiduciary of its independent duties,” that “no fiduciary may passively rely on information provided by a co-fiduciary,” and that a “fiduciary who delegates fiduciary responsibilities nonetheless retains a duty to exercise prudence” – a process that she likened to a “good old-fashioned ‘kicking the tires’ of the appointed fiduciary’s work…”.
Their role on the committee may be bounded in by the focus of that group – a focus on the investment and investment menu, for example. That said, if they’re on a plan committee, and they are influencing plan assets, they’re a fiduciary, and they should not only know that, but know what that means.
3. What being a plan fiduciary means.
Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. In addition to paying only reasonable plan expenses, these responsibilities include acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them, following the terms of plan documents, and carrying out their duties prudently. More precisely with the skill and aptitude of a person expert in such matters.
Even when the plan hires a professional investment advisor to help them – something that ERISA demands of plan fiduciaries when they lack the skill and knowledge of a prudent expert – in the NYU case above, the same judge pointed out that even then the committee could not “unthinkingly defer” to that advisor’s expertise. Rather, she said, in order to fulfill their duties, “…the Committee members must meaningfully probe” the advisor’s recommendations “and make informed but independent decisions.”
ERISA fiduciaries are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. What does that liability mean? Consider that, in the Enron case, the outside directors and committee members settled for about $100 million, most of which was paid by the fiduciary insurer. However, the individuals also had to pay approximately $1.5 million from their own pockets.
And since fiduciaries have potential liability for the actions of their co-fiduciaries, it’s also a good idea to… know who their co-fiduciaries are.
4. What’s in the plan’s Investment Policy Statement.
First, let’s acknowledge that the law doesn’t require that you have a written investment policy statement. Of course, if the law does not specifically require a written investment policy statement (IPS) – think of it as investment guidelines for the plan – ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And indeed, the vast majority of plans do have a written IPS – more than 90%, according to the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans.
More than that, generally speaking, you should find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.
5. What you’ll do to support them in this important duty.
Every plan, and every plan committee is unique. But the responsibility, and the prudent expert standard to which those responsibilities must be held has been called “the highest known to the law.” In forming and conducting the committee its imperative not only that the members be selected wisely, but that they be informed and engaged so that they can adequately and fully discharge those responsibilities.
One recent court decision (Wildman v. Am. Century Servs.) in favor of the plan committee defendants explains that the committee met regularly three times a year, and had “special meetings if something arose that needed to be discussed before the regularly scheduled meetings.” Moreover, the defendants testified that those meetings “were productive and lasted as long as was needed to fully address each issue on the agenda. On average, the meetings lasted an hour to an hour and a half.”
The plan provided “training and information about their fiduciary duties, including a ‘Fiduciary Toolkit,’ which outlined their duties as fiduciaries, as well as a summary plan document, and articles regarding fiduciary duties in general.” That kit included a copy of the current Investment Policy Statement, and the court noted that “the Committee members read these materials and took their responsibilities as fiduciaries seriously.”
And if your committee does that – well, then you’ll have the makings of a great plan committee.
- Nevin E. Adams, JD
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