A PEP-spective on Fiduciary Reviews

  Some months back, the Labor Department published an intriguing three-part “proposed rule” that, to my eye, offered helpful fiduciary tips that go well beyond pooled employer plans (PEPs).

The title alone — “Pooled Employer Plans: Big Plans for Small Businesses” — told you all you needed to know about the motives behind the publication. And, true to form, both the data provided on the current state of pooled employer plan adoption and the focus of the request for information (RFI) included were very much in the spirit of removing barriers to PEP adoption, if not outright promotion of the same.

But what I viewed as the third part of the publication (though it’s labeled V. Fiduciary Tips for Small Employers Selecting a PEP) was, to my eye, the most intriguing aspect, in no small part because it served as a valuable reminder that there ARE fiduciary considerations in making that choice — something that purveyors of that option have been known to gloss over.

As I was recently scanning these — it occurred to me that these admonitions could — and should — be broadly applied to pretty much any new plan option — and not just for small employers.

To that end, consider the following as a fill-in-the-blank template, replacing the word PEP with, say — alternative investments, cryptocurrency, retirement income, or a managed account. Consider:

The Considerations

1. Consider what ________ [i] has to offer you and your employees.

The PEP-focused explanation emphasizes an opportunity to leverage economies of scale, as well as to free up time for plan fiduciaries to run their business “…while simultaneously providing your employees with an opportunity to save and achieve retirement security.”  While that buries the lead a bit, it’s a reminder that your actions need to be prudent and in the best interests of plan participants and beneficiaries” — but mostly a reminder to consider the benefits and costs of the service(s) under consideration.

• Make sure you understand the type of ____________ under consideration.

The PEP-focused explanation notes that, while this option has certain things in common, they aren’t all the same, and don’t operate in the same way — that plan fiduciaries should consider the needs and best fit, and the importance of considering several before making a choice. The same thing is true with pretty much every option that might be under consideration, as the labels retirement income, alternative investments, and managed accounts are widely applied to very different products and operational considerations.

• Make sure you consider the experience and qualifications of the _______.

While the pooled plan provider (PPP) is mentioned here, every service offering is delivered by a provider of some type, and as this tip reminds, “understanding the experience and qualifications” of this entity “…is one of the most important — if not the single most important — aspects….” That means you need to ask and understand “questions relating to the quality of their services, customer satisfaction, prior litigation or government enforcement matters…” as well as “the number of employers and participants in the plan and the amount of its assets….” Basically, you want to make sure that the entity is capable — and has a track record — to fulfill the promises that have been made, and the needs of your plan.

• Make sure you ask questions about ________ fees.

This one really doesn’t need any more explanation, other than a reminder not only to find out what the fees are and who pays them, but also who is getting paid, notably any third parties — or third parties that might be providing compensation to the provider you’ve hired.

• Make sure you understand the investment options.

Of course, for some of the possibilities noted above, this (alternative investments, crypto) is the investment option under consideration and definitely should be understood. Ditto retirement income, which comes in many shapes and sizes (and was recently included in the executive order regarding alternative investments).

• Ask questions about your exposure to fiduciary liability for investments.
• Ask questions about your exposure to fiduciary liability should you join _____.
• Don't forget to monitor ________ on an ongoing basis.

One of the interesting call outs in the PEP document was that “under federal law, employers joining a PEP are legally responsible as fiduciaries for the proper selection of investment options for their employees unless the pooled plan provider hires an investment professional to act as a fiduciary with respect to investment selection.”  Interesting in that, again, some of the purveyors of those options have tended to gloss over/downplay this aspect.

That said it’s good to remember that, barring some kind of special provision, you are personally liable for the prudent selection and ongoing monitoring of all plan investments and services. All of which are embodied in the three tips listed above.

• Make sure you fully inquire about the implications of exiting _____.

I’ve heard it said that it’s a lot easier to get INTO a PEP than to get out of it (though that may just be a nasty rumor, and is doubtless a function of the PEP you have gotten into) — but the same could apply to any number of the other services outlined above, notably retirement income and alternative investments.

The tip here notes that it’s good to ask about any timing or penalty-imposed restrictions from a PEP, but similar impediments might, of course, be found with retirement income or different types of alternative investments. The bottom line here is that while you may not need to exercise an “exit” strategy, you need to know what the implications for the plan and participants would be if it came to that.

In Sum

So there in a nutshell you have it. For any/every product service being considered, make sure you know what benefits/costs it brings to the plan/participants, the capabilities/sustainability of the entity providing it, the fees (and who’s getting them), the process/costs for exiting — and that you have an ongoing personal liability/responsibility for monitoring the services, once engaged.

• Nevin E. Adams, JD

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[i] Just fill in the blank with the applicable service/product under consideration: managed account, retirement income, alternative investments, crypto, etc.

Between a Rock and a Hard Place

  Plan fiduciaries might well have gotten a case of severe whiplash last week.

I’m referring of course to the dual announcements from the Labor Department (a) rescinding its previous position on cryptocurrency in retirement plans and (b) indicating  that it in some fashion plans to review/change the current so-called ESG rule through a formal regulatory notice-and-comment period — presumably rather than defend the current version which had been challenged in court. That, and any day now it’s expected that the Administration will (similarly) soften, if not shift, its previous take on private equity investments in defined contribution plans.

Doubtless many are cheering these new developments; others, of course, will see this as either a danger, or a diminution of fiduciary responsibility. And some, surely, will like one, but not the other. 

Regardless, if you’re a plan fiduciary trying to figure out what is right and prudent to consider as plan investments — well, by any rational measure these shifts are abrupt, if not contradictory in effect if not purpose.   

Now, admittedly the world has changed since the Labor Department first staked out positions on these matters — markets have matured, definitions (notably ESG) have “evolved,” and while time inevitably allows us to review past experiences in a different light — we all know what has actually happened is that the Trump Administration looks at the world of retirement plans (and markets generally) differently than the Biden or Obama and even the Bush Administration(s). And even if the standards of conduct established by ERISA haven’t changed, the application of those standards apparently has. Yes, over the course of time and experience, as you would hope/expect, but more accurately over the course of change in administrations.

Worse, we live in a time when the plaintiffs’ bar — without a hint of irony — manage to find fault both with failing to add a stable value option, and the decision to add one rather than a money market alternative, to challenge as imprudent target-date funds that don’t mirror the (different) glidepaths of the rest of the “pack,” or to claim that following the legal terms of the plan document in forfeiture dispositions runs afoul of one’s fiduciary obligations. 

Add to that the growing industry chorus that a less-than-active consideration of mechanisms like in-plan retirement income constitutes a failure to consider “best interests” — and it’s no wonder that prudent plan fiduciaries feel themselves stranded in the middle of a “damned whether you do – or not” minefield.

The reality is that plan fiduciaries have always had to thread a needle of sorts; trying to act solely in the best interests of participants on matters in which they often lack the requisite expertise to make that evaluation — and in matters for which they bear personal responsibility. It’s why many do — and all arguably should — tap into the insights and experience of those who have that expertise. 

But in this “rock and a hard place” environment, you can’t fault plan fiduciaries for choosing to avoid or defer making big changes in plan design when the rules — and rule makers — change so abruptly.

• Nevin E. Adams, JD

Are There Boogeymen in the New Fiduciary Proposal?

Like many of you, I have spent a fair amount of time over the past couple of weeks reading and analyzing the impact and import of the new fiduciary rule proposal—not to mention the legal pundits who seek to tell us what they think it means, or might mean, regardless of what the proposal actually says.

At a high level, it seems to me (and several well-regarded ERISA attorneys) that retirement plan advisors who are today operating under the auspices of PTE 2020-02 should have little to worry about under the new proposal. Indeed, the biggest controversies around the proposed rule seem to be extending the reach of PTE 2020-02 to organizations and entities that hadn’t previously had to adhere to those requirements. 

But if you’re already doing so—and surely if you’re a retirement plan advisor you are—there’s little of concern in the proposal. In fact, you might well draw comfort from the possibility that entities and advisors that have competed with you for rollover business would have to adhere to the same rules and disclosures that are now part of your business, painful though it may have been to adopt them at the time. Of no small consequence is that recommendations to plan sponsors regarding which investments to include in 401(k) and other employer-sponsored plans—advice that is not subject to the SEC’s Regulation Best Interest and right now is not required to be in the customer’s best interest—would be.

Make no mistake, this is a new and considerably revised proposal. One that appears to not only have acknowledged the things that led a federal district court to vacate the 2016 rule—but to actively address and remedy those missteps. 

That said, rumors abound, and some law firms (certainly those that represent the interests of those who would be newly subject to new regulations) have, to my read anyway, been inclined to see plenty of clouds in the silver linings—and to characterize the new proposal as basically being a resurrection of the old one (to that end, the Halloween unveiling made for plenty of “zombie” references)—in the process imagining things that aren’t actually “there.” 

Perhaps the most pernicious is one that they admit isn’t there—but argue it might be; the so-called “private right of action”—which means simply that individuals would be able to sue on their own for a breach of the law. The concerns harken back to comments made during the controversy concerning the 2016 rule that the fiduciary rule was not only opening a new door for litigation, but that the Labor Department was perhaps even counting on it.     

Now, on this, and other points in the new proposal, the DOL acknowledges both the issues raised in the vacating of the rule by the Fifth Circuit, and the deliberate steps they’ve taken to avoid those issues in the new proposal. “The 2016 Rulemaking was significantly different than the current rulemaking,” the DOL explains in the preamble to the proposed rule, “in that it imposed a fiduciary obligation on virtually all investment recommendations specifically directed to retirement investors, imposed demanding contract and warranty requirements in the IRA market, which gave investors a direct cause of action against firms and advisers for breach of the Impartial Conduct Standards, and represented a significant break from the then-existing regulatory baseline.”

To be sure, there is already a cause of action for fiduciary breaches under ERISA for recommendations to plans and participants—and there’s no question that while under a recent decision in a Florida district court, rollover recommendations are not considered fiduciary recommendations under current law—but will be under the proposed rule.

That said, in considering this latest proposal, one notable DC law firm says, for example that the proposal includes “strong enforcement mechanisms, including provisions that give the DOL oversight and authority over firms’ individual retirement account (IRA) business and (although DOL claims otherwise[i]) a potential private right of action.” That’s right—even though the Labor Department specifically says otherwise, this law firm has chosen to read between the lines and see the potential for something the DOL explicitly denies. 

In fact, the Labor Department clearly states in a footnote in the preamble of the proposed rule that (the underline is mine, for emphasis) “Unlike the PTEs that were a part of the 2016 Rulemaking, these PTEs do not, and the amendments would not, include required contracts or warranties that the Fifth Circuit objected to.”  

The footnote goes on to explain that “these prohibited transaction exemptions also do not exempt a party from status as a fiduciary, and therefore, the proposals do not affect the scope of the regulatory definition of an investment advice fiduciary. Rather, the exemption proposals involve an exercise of the statutory authority afforded to the Department by Congress to grant administrative relief from the strict prohibited transaction provisions in Title I and Title II of ERISA for beneficial transactions involving plans and IRAs.”

Now, the standard of care for “conflicted” recommendations to plans, participants and IRAs is the Best Interest Standard—a combination of the prudent man rule and duty of loyalty. If the “conflicted” recommendation isn’t in the best interest of a retirement investor, the protection of the prohibited transaction exemption (PTE) is lost and the advisor isn’t permitted to be legally compensated. That said, the best interest standard in the PTE isn’t actionable.

Another critical “boogeyman” that proposal critics claim to have seen there is an undermining of the ability to enforce arbitration clauses as a precursor to litigation. I say “conjured” because—unlike a controversial provision in the 2016 rule that barred the use of the Best Interest Contract Exemption (BIC) if advisory contracts included an arbitration requirement—there is no mention or reference to that in the current proposal.        

There’s plenty still to analyze and evaluate in this new proposal—and arguably not as much time to do so as we might prefer. Here’s hoping most of that time and energy is spent on the things that are actually in the proposal instead of imaginary “monsters” that aren’t. 

 - Nevin E. Adams, JD

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[i] Their exact words.

Survey Says—Or Does It?

When you see a headline that confirms your sense of the world, you’re naturally predisposed to embrace, remember (and these days “share”) it as a validation of what you already perceive reality to be.

Indeed, as human beings, we’re drawn to perspectives, surveys, and studies that validate our sense of the world. This “confirmation bias,” as it’s called, is the tendency to search for, interpret, favor, and recall information in a way that confirms our preexisting beliefs or hypotheses. It also tends to make us discount or dismiss findings that run afoul of our existing beliefs—even if the grounds supporting that premise are shaky, sketchy, or (shudder) downright scurrilous.

Here are some things to look for—likely in the fine print or footnotes—as you evaluate those findings.

There can be a difference between what people say they will (or might) do and what they actually will.

No matter how well targeted they are, surveys (and studies that incorporate the outcome of surveys) must rely on what individuals tell us they will do in specific circumstances, particularly in circumstances where the decision is hypothetical. When you’re dealing with something that hasn’t actually occurred, or doesn’t actually exist, there’s not much help for that, but there’s plenty of evidence to suggest that, once given an opportunity to act on the actual choice(s), people do, in fact, act differently than their response to a survey might suggest.

Let’s face it, people tend to be less prone to action in reality than they indicate they will be—inertia being one of the most powerful forces in human nature. Also, sometimes survey respondents indicate a preference for what they think is the “right” answer, or what they think the individual conducting the survey expects, rather than what they might actually think (particularly if it’s something they haven’t previously thought about). That, of course, is why the positioning and framing of the question can be so important (as a side note, whenever possible, it helps to see the actual questions asked, and the responses available).

Now, survey takers will inevitably champion the higher accuracy rate of in-person surveys (or at least phone calls) versus online surveys, though the latter are ever more common (and less expensive to conduct).  

The bottom line is that when what people tell you they will do, and if you later find that they don’t—just remember that there may be more “powerful” forces at work.

There can be a difference between what people think they have, what they say they have, and reality.

Since, particularly with retirement plans, there are so few good sources of data at the participant level, much of what gets picked up in academic research is based on information that is “self-reported,” which is to say, it’s what people tell the people taking the survey. The most prevalent is, perhaps, the Survey of Consumer Finance (SCF), conducted by the Federal Reserve every three years.

The source is certainly credible, but it’s based on phone interviews with individuals about a variety of aspects of their financial status, including a few questions on their retirement savings, expectations about pensions, etc. In that sense, it tells you what the individuals surveyed have (or perhaps wish they had), but not necessarily what they actually have.

Perhaps more significantly, the SCF surveys different people every three years, so it pays to be wary of trendlines that are drawn from its findings—such as increases or decreases in retirement savings. Those who do are comparing apples and oranges—more precisely the savings of one group of individuals to a completely different group of people… three years later.

The survey sample size and composition matter.

Especially when people position their findings as representative of a particular group, you want to make sure that that group is, in fact, adequately represented. Perhaps needless to say, the smaller the sampling size—or the larger the statistical error—the less reliable the results.

Case in point: Several months ago, I stumbled across a survey that purported to capture a big shift in advisors’ response to the Labor Department’s fiduciary regulation. Except that between the two points in time when they assessed the shift in sentiment, they wound up talking to two completely different types of advisors. So, while the surveying firm—and the instrument—were ostensibly the same, the conclusions drawn as a shift in sentiment could have been nothing more than a difference in perspective between two completely different groups of people—at two completely different points in time.

When you ask may matter as much as what is asked.

Objective surveys can be complicated instruments to create, and identifying and garnering responses from the “right” audiences can be an even more challenging undertaking. That said, people’s perspectives on certain issues are often influenced by events around them—and a question asked in January can generate an entirely different response even a month later, much less a year after the fact.

For example, a 2020 survey of plan sponsor sentiment on a topic like ESG litigation is unlikely to produce identical results to one conducted in the past 30 days, any more than an advisor survey about the potential impact of the fiduciary regulation prior to its publication would likely match that of advisors dealing with those realities six months after publication. Down in those footnotes about sample size/composition, you’ll likely find an indication as to when the survey was conducted. There’s nothing wrong with recycling survey results, properly disclosed. But things do change, and you need to be careful about any conclusions drawn from old data.

Consider the source(s).

Human beings have certain biases—and so do the organizations that conduct and pay to conduct surveys and studies conducted. And sometimes the organizations paid to conduct such surveys are aware of those biases, and—consciously or unconsciously—that filters in to the way questions are posed, or in the way results are evaluated.

Not that sponsored research can’t provide valuable insights. But approach with caution the conclusions drawn by those who tell you that everybody wants to buy the type of product(s) offered by the firm(s) that have underwritten the survey.   

Be wary of sentiment ‘aggregation.’

It’s rare that the authors of a particular survey don’t have a preferred/expected outcome in mind—but legitimate surveys, objectively worded, sometimes receive a more tepid response than those authors might prefer. Typical are those that claim a “majority” are in favor of a certain outcome—a majority that requires combining what is generally a small minority who are strongly in favor with a (much?) larger number who are (only) somewhat in favor (for example, 16% strongly in favor, 35% somewhat favor turns into “A Majority Favor…”). 

It’s not exactly exaggerating to say that the combined result is at least somewhat supportive—but it can produce a result that is positioned far more enthusiastically in favor of a particular outcome than a discerning look at actual adoption/take-up later reveals.

Compound ‘Interests’

One of the more obvious ways to get people’s attention is to publish a survey/study that purports to find a dramatic impact of some kind. Basically, the authors will state an assortment of assumptions (and they’ll make no bones about THAT), and then take those assumptions, multiply them and…voila a gigantic impact that warrants attention (or at least clicks, likes and shares). 

The math checks out, so next thing you know it’s a headline where, as Mark Twain once noted, a “lie” travels around the world while the truth is still getting its boots on. It does so by being picked up, uncritically, by news media outlets which (apparently) draw comfort from the academic credentials of the authors—and their ability to lay the veracity of the claims at THEIR feet. 

When, in fact, all they’re doing is compounding the problem(s).     

- Nevin E. Adams, JD

7 Things to Know About the New ESG Regulation

A little more than a week ago, the U.S. Department of Labor unveiled its much-anticipated final ESG rule.  There’s a lot to unpack in that regulation (and the rest of the 236-pages that help explain its process and rationale), but here’s a few things that seem particularly important to note at the outset.

There are some (important) things that did NOT change.

First, and to my mind, foremost, the Labor Department noted that “The duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries (such as by sacrificing investment returns or taking on additional investment risk) to objectives unrelated to the provision of benefits under the plan.

But it also included an important clarification:

“…the final rule amends the current regulation to make it clear that a fiduciary’s determination with respect to an investment or investment course of action must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis and that such factors may (emphasis mine) include the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action.”

It does away with “pecuniary” as a standard (or at least as a word claiming to be the standard).

The Trump Administration’s version defined pecuniary (a term “introduced” to the ERISA lexicon by the United States Supreme Court in the Fifth Third v. Dudenhoefer decision[i]) as “a factor that a fiduciary prudently determines is expected to have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy established pursuant to section 402(b)(1) of ERISA.” 

However, that word choice was determined by the Labor Department to be causing “confusion” and to have a “chilling effect” — “deterring fiduciaries from taking steps that other marketplace investors would take in enhancing investment value and performance, or improving investment portfolio resilience against the potential financial risks and impacts associated with climate change and other ESG factors.”

However, and despite what some saw as an implication in the proposed regulation, the final regulation does NOT mandate consideration of ESG factors.

Quite the contrary—quoting from the Labor Department:

“The final rule makes unambiguous that it is not establishing a mandate that ESG factors are relevant under every circumstance, nor is it creating an incentive for a fiduciary to put a thumb on the scale in favor of ESG factors.” 

“Outside the ERISA context, investors may choose to invest in funds that promote collateral objectives, and even choose to sacrifice return or increase risk to achieve those objectives. Such conduct, however, would be impermissible for ERISA plan fiduciaries, who cannot sacrifice return or increase risk for the purpose of promoting collateral goals unrelated to the economic interests of plan participants in their benefits.”

It treats QDIAs just like any other investment option in the plan.

The Trump Administration in its preliminary regulation had barred funds with an ESG focus from qualifying as a qualified default investment alternative (QDIA), and then—following criticism on that front—in its final regulation modified the provision in the proposal on QDIAs to prohibit plans from adding or retaining any investment fund, product, or model portfolio as a QDIA or as a component of such a default investment alternative, if its objectives, goals or principal investment strategies include the use of non-pecuniary factors.

The new regulation removes that distinction, noting that “QDIAs would continue to be subject to the same legal standards under the final rule as all other investments, including the prohibition against subordinating the interests of participants and beneficiaries in their retirement income to other objectives. QDIAs also would continue to be subject to the separate protections of the QDIA regulation.”

That said, the Labor Department says it expects to see an increase in the number of QDIAs that are ESG funds—though, considering the number currently in the market (and there are some), that hardly seems a controversial call.

Eliminated additional disclosure/labeling requirements associated with alternative investments with collateral benefits.

The Trump era regulation imposed a requirement that competing investments be indistinguishable based solely on pecuniary factors before you could turn to collateral factors to break a tie—oh, and even then, you would have had to comply with a special documentation requirement on the use of such factors.

The final rule, on the other hand, replaces that with a standard that instead requires the fiduciary to conclude prudently that competing investments, or competing investment courses of action, equally serve the financial interests of the plan over the appropriate time horizon—and, having determined that they equally serve those goals, is not prohibited from selecting the investment, or investment course of action (like an ESG focus), based on collateral benefits other than investment returns. 

And they no longer have to document that evaluation (which, interestingly enough, turns out to be one of the cost benefits[ii] associated with the new rule). 

Participant preferences can (still) play a role in menu design.

Now, in my experience, plan sponsors (and advisors) have long considered participant preferences in menu design. Not to the subordination of prudent fiduciary standards, of course—though there have been concerns that some might not see it that way. 

Well, the new regulation contains a new and interesting provision that “clarifies” that fiduciaries “do not violate their duty of loyalty solely because they take participants’ preferences into account when constructing a menu of prudent investment options for participant-directed individual account plans. If accommodating participants’ preferences will lead to greater participation and higher deferral rates, as suggested by commenters, then it could lead to greater retirement security."

Now, notice that while such considerations don’t necessarily violate the duty of loyalty—but there is no setting aside of the standards of prudence in evaluating and monitoring those investments noted above.  More specifically, those decisions need to be evaluated “taking into consideration the risk of loss and the opportunity for gain” compared to the opportunity for gain “with reasonably available alternatives with similar risks.”   

As noted above, there’s a lot to unpack here—and we’ll continue to do so right up to the Jan. 30, 2023 effective date—and beyond.

- Nevin E. Adams, JD

 

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[i] In that case, the nation’s highest court concluded that the responsibilities of an ESOP fiduciary must be directed toward the duty to provide benefits and defray expenses—and that any non-pecuniary interests, such as Congress' strong encouragement of employee stock ownership, did not warrant an alteration of the fiduciary standard.  

[ii] Noting that in view of the “large scale of investments held by covered plans, approximately $12.0 trillion, changes in investment decisions and/or plan performance may result in changes in returns in excess of $100 million in a given year,” the Labor Department estimates that 20% of defined contribution and defined benefit plans (149,300 plans with some 28.5 million participants) will be affected by the regulation “because their fiduciaries consider or will begin considering climate change or other ESG factors when selecting investments.” In the Labor Department’s estimation, for each plan, a “legal professional will need to review paragraphs (b)-(c) of the final rule, evaluate how these provisions might affect their investment practices and assess whether the plan will need to make changes to investment practices. The Department estimates that this review will take a legal professional approximately four hours to complete, resulting in an aggregate cost burden of approximately $91.5 million or a per-plan cost burden of approximately $613.[ii]”

That said, the Labor Department noted that plan fiduciaries “generally already undertake deliberative evaluations as part of their investment selection decision-making process and this final rule does not add burden to those deliberations; but rather, the final rule clarifies that the scope of those deliberations may include climate change and other ESG factors within the confines of paragraphs (b)(4) and (c)(1) of the final rule. The Department does not intend to increase fiduciaries’ burden of care attendant to such consideration; therefore, no incremental costs are estimated for these requirements.”

5 Dangerous Fiduciary Assumptions

There’s an old saying that when you assume… well, here are some assumptions that can create real headaches for retirement plan fiduciaries.

Assuming that the worst-case deadline for depositing participant contributions IS the deadline for depositing participant contributions.

The legal requirements for depositing contributions to the plan are perhaps the most widely misunderstood elements of plan administration. A delay in contribution deposits is also one of the most common signs that an employer is in financial trouble—and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst-case situation (the 15th business day of the month following) to be the legal requirement. It is not.

Assuming that not being required to have an investment policy statement means you don’t need to have an investment policy.

While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement (IPS), the reality is that the law does not require one, and thus, many plan sponsors—sometimes at the direction of legal counsel—choose not to put one in place.

Of course, while the law does not, in fact, specifically require a written 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, generally speaking, plan sponsors (and the advisors they work with) will find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards—if those standards are already in writing, 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.

Assuming that ERISA’s required fiduciary bond covers your liability as an ERISA plan fiduciary. 

These are two very different things with similar names. Suffice it to say that the Fidelity Bond required by ERISA protects the plan and its participants from potential malfeasance on the part of those who handle plan assets. The plan is the named insured in the fidelity bond. 

On the other hand, Fiduciary Liability Insurance typically protects the plan’s fiduciaries from claims of a breach of fiduciary responsibilities—an important protection since ERISA plan fiduciaries have personal liability, not only for their actions, but for the actions of their co-fiduciaries. The cost of the insurance can be paid by the employer or by the plan fiduciary—but not from plan assets.

Assuming that hiring a fiduciary keeps you from being a fiduciary.

ERISA has a couple of very specific exceptions through which you can limit—but not eliminate—fiduciary obligations. The first has to do with the specific decisions made by a qualified investment manager—and, even then, a plan sponsor/fiduciary remains responsible for the prudent selection and monitoring of that investment manager’s activities on behalf of the plan.

The second exception has to do with specific investment decisions made by properly informed and empowered individual participants in accordance with ERISA Section 404(c). Here also, even if the plan meets the 404(c) criteria (and it is by no means certain it will), the plan fiduciary remains responsible for the prudent selection and monitoring of the options on the investment menu (and, as the Tibble case reminds us, that obligation is ongoing).

Outside of these two exceptions, the plan sponsor/fiduciary is essentially responsible for the quality of the investments of the plan—including those that participants make. Oh, and hiring a 3(16) fiduciary? Still on the hook as a fiduciary for selecting that provider.

Assuming you have to figure it all out on your own.

ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law—and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

The “familiar with such matters” is the sticking point for those who might otherwise be inclined to simply adopt a “do unto others as you would have others do unto you” approach. Similarly, those who might be naturally predisposed toward a kind of Hippocratic, “first, do no harm” stance are afforded no such discretion under ERISA’s strictures. That said, the Department of Labor has stated that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

Simply stated, if you lack the skill, prudence and diligence of an expert in such matters, you are not only entitled to get help—you are expected to do so.

- Nevin E. Adams, JD