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

5 Things Your Plan Committee Members Need to Know

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

5 Things That (Should) Scare Plan Fiduciaries

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night. But what are the things that keep – or should keep – plan fiduciaries up at night?

Well, there are the things like…

Getting Sued
Plan sponsors will often mention their fear of getting sued (actually, their advisors frequently broach the topic), and little wonder. The headlines are (still) full of multi-million dollar lawsuits against multi-billion dollar plans, and if relatively few seem to actually get to a judge (and those that do have – to date – largely been decided in the plan fiduciaries’ favor), they nonetheless seem to result in multi-million dollar settlements. Oh, and not only has this been going on for more than a decade, the issues raised are evolving as well.

As a plan fiduciary, you can be sued, of course; and let’s not forget that that includes responsibility for the acts of your co-fiduciaries, and personal liability at that (see 7 Things an ERISA Fiduciary Should Know).

That said – and more than a decade after the first series was launched – those cases (still) seem to involve a relatively small group of rather large plans. If it’s (still) astounding that some of the plans do the things they are alleged to do (and not do), for those familiar with the math of contingent fee litigation, there’s little mystery to the big plan focus.

Of course, most plan sponsors won’t ever get sued, much less get into trouble with regulators. And those who do are much more likely to drift into trouble for things like late deposit of contributions, errors in nondiscrimination testing, or not following the terms of the plan.

Still worried about getting sued? As one famous ERISA attorney once told me, they might as well worry about getting hit by a meteor.

Plan Costs

Whether you feel that the aforementioned wave of litigation has been a force for good or ill, it has certainly contributed to a heightened awareness of fees by plan sponsors – and one that finally seems to be moving beyond squeezing that extra pound of flesh from recordkeepers (though there’s still plenty of that).

These days it’s as likely to show up in questions about shifting to passive options, or at least an inquiry about a different share class. Questions are good – actions potentially better.

Regardless, it would seem to be difficult to live up to ERISA’s fiduciary admonitions to ensure that the fees and services provided to the plan are reasonable if you don’t know what you’re getting, or how much you’re paying.

Target Date Fund Glidepaths

Remember 2008 – when so many discovered for the first time that target-date funds and their glide paths really are  different? Over the last decade, the sheer amount of money that has been invested in these QDIAs (most defaulted along with the expansion of automatic enrollment) – nearly $2 trillion at the end of 2017 – means that participants are likely better diversified than ever before, with portfolios that are regularly and professionally managed and rebalanced.

With luck, things like the 2008 financial crisis won’t recur in our lifetime. On the other hand, on the offhand chance that that – or something like it – does, this might be a good time to look under the bed – er, glidepath – and make sure that the assumptions incorporated there are consistent with expectations.

Personal Liability

Most of the aforementioned concern about being sued seems borne from a concern about the damage – both reputational and financial – to the organization that sponsors the plan. While that is certainly a well-founded and rational concern, plan fiduciaries, particularly plan sponsors, often seem oblivious to the reality that their liability as an ERISA fiduciary is… personal.

You can, of course, buy insurance to protect against that personal liability — but that’s likely not the fiduciary liability insurance that most organizations have in place. And it may not be enough.

Failing to Engage the Knowledge of a Prudent Expert

ERISA’s “prudent man” rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard.

The Department of Labor notes that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

Indeed.

Because, when it comes to the former, most people do – and as for the latter, many still don’t.

- Nevin E. Adams, JD