I'm Not A Fiduciary-It's That Other Guy

                                                                                  By Carol Buckmann

 We are stuck at 43%.  A 2017 defined contribution plan survey by J.P. Morgan indicates that there has been no improvement in this percentage of corporate plan decision-makers who don’t understand that they are fiduciaries.  17% even thought that they could pass on all of their fiduciary responsibilities to third parties such as their provider, recordkeeper or investment adviser.  Not surprisingly, the survey also indicated that those who were aware of their fiduciary status were more confident in their processes, more aware of fiduciary protections and more likely to follow best practices.

What are we to make of this?  It appears that all of the recent publicity about the Fiduciary Rule and the role of advisers hasn’t made any impression on this group.  Nor have the statements in the service contracts they sign which either acknowledge that the provider is not a fiduciary or provide that the adviser will be a “co-fiduciary” for investments.  What do they think the “co” means? While it may be that some of these clueless fiduciaries won’t get the message until they are audited or sued, this survey provides a compelling reason to expand fiduciary education efforts.

Overcoming Resistance.  The first reaction of busy executives to the suggestion that they need fiduciary education is usually “I have to run my business. I don’t have the time.”  This is a good opportunity to explain the concept of personal liability for fiduciary breaches, which usually gets their attention.  It is also a good time to explain how good processes and procedures, as well as delegation to other professional fiduciaries, can limit their liability exposure.  Decision-makers who don’t know they are fiduciaries probably also don’t have fiduciary insurance covering their plan activities, and understanding available protections can also be a selling point for fiduciary education.  Finally, while fiduciary education isn’t legally required by any specific rule, Department of Labor auditors do look to see if there has been fiduciary education as part of their audits. This makes sense, as it is unlikely that company insiders are effectively fulfilling their fiduciary responsibilities if they don’t know what they are.

Topics to Include.  Start with bonding.  Even today, I find plan fiduciaries who don’t understand that they need to be bonded for losses caused by fraud or dishonesty.  If they haven’t complied, they can be required to personally make up losses that should have been covered.  In addition, good education should include discussion of the following:

·       Safe harbors, including ERISA 404 (c) and qualified default investment alternatives

·       Outsourcing to fiduciary investment managers and professional plan administrators

·       Sharing responsibilities with co-fiduciaries

·       The importance of written policies and procedures

·       Monitoring plan providers

·       What auditors look for

The bottom line is that corporate decision-makers need to be made to understand that “the buck stops here.”





Are Your Target Date Funds Making You A Target?


                                                   By Carol Buckmann


Odds are high that target date funds are your 401k plan’s default investment.  These funds, which shift the mix of stock, bonds and cash based on the participant’s expected retirement age, are referred to as tdfs and have become extremely popular since the Department of Labor designated them as a permissible qualified default investment alternative, or “QDIA”.  Plan fiduciaries receive the protection of a safe harbor if they prudently select a QDIA for participants who don’t or can’t make their own investment choices.  However, if fiduciaries imprudently select a tdf, the safe harbor doesn’t protect them.

Although participants’ entire accounts may be invested in these funds, all too many tdfs are selected by fiduciaries simply because it is convenient, or there is some incentive, to offer their provider’s funds.  This makes them an easy target for class action lawyers.  Custom funds, which are designed for an employer’s specific participant group, are also vulnerable if they don’t include appropriate investments.

The plaintiff’s firm Cohen Milstein has a section on its website on target date fund investigations.  Their review focuses on improper investment strategies, excessive fees, self-dealing issues and whether the selection of the funds was prudent.  Participants are encouraged to contact the firm to review the plan’s information. 

We have had a number of suits already filed challenging tdfs.  A suit against Intel challenging use of alternative investments such as hedge funds in a custom target date fund was recently dismissed as not timely filed, but the complaint raises issues that, if true, might have been found to be a fiduciary breach.  Johnson v. Fujitsu challenged the use of alternative asset classes such as real estate partnerships and natural resources in a custom target date fund. Wells Fargo was sued for using its own tdfs even though plaintiffs contended that they cost 2.5 times the cost ofsimilar funds offered by Fidelity and Vanguard. In fact, use of proprietary tdfs is a red flag for the litigators.

These funds may be a ticking time bomb for plan fiduciaries who haven’t prudently investigated and compared their plan’s tdfs to other options available in the market.  There are lots of differences between tdfs.  Do you know what they are?

Here is a short checklist for company fiduciaries:

  •        Do we know the alternative QDIA choices (balanced funds and managed accounts) and              have we compared them to tdfs?
  •        Do we know our funds’ glide path?  This is the way the asset allocation changes as                      participants age, and it can differ from fund to fund, making some more conservative and          some riskier than others. 
  •        Have we benchmarked our tdf’s fees against competing offerings?
  •        Have we considered whether to use an off-the shelf tdf (usually investing in mutual funds)          or a custom tdf? 
  •        If we are using a custom tdf, have we evaluated the investments included, particularly                alternative investments? How much of the tdf is invested in alternative investments?
  •        Have we evaluated and benchmarked our funds’ performance? 
  •        Do we regularly monitor our tdf’s performance and fees, which can change over time?

A prudent fiduciary process remains the best defense if your plan’s tdf is challenged.  





How To Make Your 401(k) or 403(b) Plan a Litigation Target

                              MAKE YOUR 401k (or 403b) PLAN A LITIGATION TARGET

                                                                  By Carol Buckmann


Nobody wants to be sued.  Still, writing about plan fee and investment litigation really focuses attention on what plan fiduciaries are doing (or not doing) to come into the sights of the class action lawyers representing plaintiffs.  Sometimes it seems as if these defendant fiduciaries were almost asking to be sued, since the practices being described in the complaints are so vulnerable to challenge. These lawsuits keep proliferating, so fiduciaries of 401k and 403b plans would be well advised to learn from what the defendants were alleged to have been doing wrong.

If you want to invite a lawsuit, do the following----

                Adopt an Investment Policy Statement, then never consult it again.  Outside advisers rightly urge their fiduciary clients to adopt a formal investment policy statement (IPS) setting forth the goals and procedures for selecting, monitoring and replacing investments.  Yet adopting a policy and not following it can be worse than not having a written policy at all.  The Department of Labor considers the policy one of the instruments and documents governing the plan, which means that mere failure to follow the IPS can be a fiduciary breach. More importantly, failure to follow the IPS will likely result in your participants having a sub-optimum investment menu.

                Don’t Benchmark Your Fees or Do Periodic RFPs.  If you are happy with your current provider, why do this?  You need an ongoing reference to determine whether you are overpaying for services and whether other competitors might be providing useful additional services that your current provider doesn’t offer.  You might find reasons not to be so satisfied with your current provider, but at the least, you will know whether you should be renegotiating your current provider’s fees.

                Load Your Investment Menu with Proprietary Funds.  Recent litigation has focused on providers who put their own funds in their employee plans even though they weren’t top performers.  Another red flag is the use of the provider’s target date funds without investigating whether they are the best in their class.

                Try to Do Everything In House.  Unless you are a very large business with employees who have real expertise about pension investments, and the time to properly review them, you are courting disaster trying to do everything in house.  With smaller businesses this is sometimes a result of a reluctance to cede control to an outsider rather than trying to cut costs.  However, just about every plan needs professionals advising about investments and fees.  And those professionals should acknowledge that they are ERISA fiduciaries, regardless of what happens with the Fiduciary Rule under the new administration. There are many good advisers currently operating under a fiduciary standard to choose from.

                Enter into a Revenue Sharing Arrangement, then fail to monitor payments.  There are alternatives to paying for plan services through revenue sharing that are more transparent, but if you do enter into a revenue sharing arrangement, make sure that your provider isn’t being overpaid or that revenue sharing is not being used to pay for services to the plan sponsor rather than the plan participants.

                Use Multiple Recordkeepers and Providers.  This has become a big issue in the lawsuits that have recently targeted large universities and health care providers who sponsor 403b plans.  Often there may be historic reasons for using multiple providers, but the use of multiple providers to provide the same services seems likely to result in overlapping services, inefficiencies, and a failure to leverage total asset size to get lower fees.  The same argument could be made for plans with multiple funds in the same asset class.  For example, if these investments were consolidated into one fund, they might become eligible to invest in cheaper institutional class shares.

                Set It and Forget It, because nobody is complaining. Just because you picked an appropriate menu years go does not mean that your menu is the best for participants today.  Fiduciaries need to monitor performance against benchmarks, and to be aware of new funds and alternatives to regular mutual funds, such as separate accounts and collective investment funds.  The U.S. Supreme Court in Tibble v. Edison affirmed that fiduciaries have an ongoing duty to monitor plan investments.

                Don’t Hold Regular Committee Meetings.  Running your business may be a priority, but business priorities shouldn’t cause frequent delays or cancellations of Committee meetings.  And you should have a committee, or at least specific employees assigned to oversee specific plan operations.  Meeting with your outside advisers on a regular basis facilitates monitoring of fees and investments, and also makes sure that the plan’s fiduciaries keep abreast of changes in the law.  Prepare agendas and keep written Minutes to record what is discussed and the reasons for decisions.

                The most important “don’t” may be don’t assign your plan or plans a low priority.  The big lesson of recent litigation is that fiduciaries always need to have the plans on their radar screens.

Archive: Benefits Blog Cohen & Buckmann

Size Matters: Do Your Fiduciaries Negotiate for Lower 401(k) Plan Fees?

by Carol Buckmann



You have negotiating power when you buy a car.  How about your 401(k) Fees?

You have negotiating power when you buy a car.  How about your 401(k) Fees?

Size matters.

 Fiduciaries of very large plans who wouldn’t think of not haggling with a dealer over the price of a new car or a hotly negotiating a business deal have sometimes neglected to leverage their plan’s size to negotiate lower 401(k) fees.  The result is a sharply increased risk of being sued. 

Fund Classes Matter. 

A few years ago, Wal-Mart entered into an expensive settlement of a lawsuit challenging its use of retail mutual funds in its 401(k) plan and requiring changes in its fiduciary practices.  One of the contentions in the suit was that Wal-Mart’s fiduciaries didn’t use the plan’s size to invest in institutional class funds that made the same investments with lower fees than the retail funds Wal-Mart made available to participants.  (Only large investors are eligible to invest in institutional class finds.)  We have just had another lawsuit filed against a jumbo 401(k) plan (with over $5 ½ billion in assets) sponsored by Delta Airlines which underscores the need for fiduciaries to use their plan’s bargaining power.  The newly filed suit names the plan committee as defendents and also challenges the class of funds selected for investment as not having the lowest fees available.

Too Many Funds?

Some of the other allegations in the Delta complaint are similar to those made in recent suits filed against the university sponsors of 403(b) plans.  For example, it is alleged that the Delta plan had 200 investment options prior to 2011. In addition to resulting in participant confusion, the complaint alleges that consolidation of these funds, many of which were in the same asset class, would have increased the plan’s bargaining power.  Though not mentioned in the Delta complaint, it is also possible that having so many funds could be a fiduciary breach, since there will inevitably be a mix of good and not-so-good funds in such a large menu.  The complaint cites survey results indicating that the average 401(k) plan has only 14 options.  Shouldn’t the fiduciaries have tried to winnow the menu down to the best funds? 

Other Claims.

The following additional arguments were made in the Delta complaint:

  • the inclusion of many funds of the same type mimicked an index fund but without the low fees that would have applied if actual index funds were selected for the menu.
  • using funds with higher fees can’t be defended, because studies show that funds with higher fees don’t outperform other funds over the long haul.
  • the fiduciaries should have regularly solicited competitive bids for recordkeeping services.
  • plan recordkeeping fees should be determined as a flat fee per participant rather than a percentage of assets.  It doesn’t cost more to administer a plan with more assets or to service larger accounts.
  •  the fiduciaries should have monitored the amount of revenue sharing payments going to the recordkeeper on top of the basic recordkeeping fee, and should have negotiated for a refund of any revenue sharing payments that caused the plan to overpay for the value of services provided.

Some of these claims seem to be an attempt to convert opinions into hard-and-fast rules-for example, is it never appropriate to select a fund with higher fees?  Individual managers can beat the averages and might generate good net returns.  However, others, if true, are just describing a failure to follow prudent procedures. How many of these practices apply to your plan?

Don’t Forget the Agreement:

 One of the biggest mistakes fiduciaries can make is starting off by simply accepting the service provider’s form service agreements.  Not only the fees, but other provisions of these agreements are negotiable.  For example, size can be leveraged to get better indemnification provisions or to remove mandatory arbitration provisions that the plan sponsor may not want.  It is always useful in these situations to have input from an ERISA attorney who negotiates these provisions on a regular basis and know the right things to ask for.


Two More Victories for the Fiduciary Rule - But Will They Be Hollow Ones?

by Carol I. Buckmann





The score is now 3-0.

More Decisions Back the DOL.

Following in the footsteps of a District of Columbia district court judge, a second judge in Kansas refused to issue an injunction barring enforcement of parts of the Department of Labor's fiduciary rule. The Kansas judge, in another well-reasoned decision, found that the United States Department of Labor did not violate the Administrative Procedure Act when it issued the rule, and that plaintiffs were not likely to prevail in their challenges to the rule as it applied to fixed index annuities. Just a few days ago, the D.C. appeals court upheld the D.C. district court decision and refused to enjoin enforcement of the rule pending a decision on appeal. This is another sign that the plaintiffs are not likely to prevail on the merits at the end of that litigation.

More Decisions to Come.

Although a pattern seems to be emerging, consistent with typical judicial deference to overturn an agency's interpretation of a statute, there are other cases challenging the fiduciary rule pending in Texas and Minnesota. Courts in the Fifth Circuit sometimes march to a different drummer, though, and that has in the past been the source of some unanticipated decisions, including the recent decision overturning the new overtime rules.

Appeals will undoubtedly follow, regardless of how the remaining courts come out, and we are not likely to have all of these resolved by the April, 2017 general implementation date for the rule.

What Will the Trump Administration Do?

However, the big question here is whether any decisions upholding the fiduciary rule will be nullified by actions of the new Trump administration. No one knows yet, for as far as we know, Mr. Trump himself has not directly expressed any views on the rule one way or the other. He and his advisers may be opponents of complex regulations, but as they are finding out in trying to plan for repeal of the Affordable Care Act, undoing things is not always easy. The President-elect did not identify as a strong supporter of Wall Street during his campaign, so I think it is too soon to conclude with any certainty that the fiduciary rule is dead. Delaying or revising it are also possibilities.

What to Do Now.

What should those affected by the rule be doing? My colleagues have been speaking and writing about this issue, and their consensus seems to be that it is likely that some form of the fiduciary rule, perhaps with a delayed effective date, may remain in place. For example, this was SEI's comment on releasing a recent advisor survey:

"We believe advisors need to continue to prepare for the DOL rule despite current speculation that it will not come to fruition because of the incoming administration," said Wayne Withrow, Executive Vice President of SEI and Head of the SEI Advisor Network. "These survey results demonstrate that the rule is impacting advisors' considerations in several aspects of their business when looking at 2017, which is one reason we are seeing advisors re-evaluate their infrastructure, increase attention to client-facing activities and focus on the outsourcing of non-client facing activities."

The only safe advice we can give clients at the moment is to go ahead with their compliance efforts. Many large players on the field, like Merrill Lynch and Morgan Stanley, have already determined how they plan to comply and are taking steps to implement those changes.

Can You Put the Genie Back in the Bottle?

As I have previously written, regardless of the fiduciary rule's fate, the genie is already out of the bottle. The mainstream press has focused attention on the current situation that permits non-fiduciaries to give conflicted advice. The wave of class action litigation against plan fiduciaries challenging plan fees and investments continues unabated. Department of Labor audits will continue. It will be hard for plan sponsors and in-house fiduciaries to justify relying on advice from advisers who are not fiduciaries, regardless of whether the law is changed. And it will not be so easy for entities that have already announced that they will take on a fiduciary role to backtrack and revert to non-fiduciary status. The landscape has already changed.

Fiduciary Rule Survives First Court Challenge - Will Other Courts Follow?

by Carol Buckmann



A district court in Washington D.C. has just handed the Department of Labor a significant victory in its efforts to derail legal challenges to the fiduciary rule.  The decision itself is 92 well-reasoned pages, and contains a clear refutation of the arguments put forth by NAFA,  a group of whose members sell fixed annuities, challenging the rule.  The court not only refused to enjoin the regulations on an interim basis, but made a final ruling on summary judgement.

The Big Picture.

Prior to the effective date of the fiduciary rule,  a broad class exemption generally permits the receipt of commissions in connection with annuity sales, and due to the rule that recommendations do not result in fiduciary status unless advice is given on a “regular basis”, a one-time sale would not currently trigger fiduciary responsibilities.  In addition to objecting to the new fiduciary definition, plaintiffs specifically objected to the new structure that will impose  Impartial Conduct Standards (including prudence, loyalty and avoidance of misleading statements) in order to receive commissions on annuity sales under the  Best Interest Contract (BIC) Exemption.

Courts are usually reluctant to substitute their judgment for that of the agency with authority to interpret a statute, and this decision is no exception.  The court rejected arguments that the Department of Labor exceeded its authority in issuing the fiduciary rule and was not sympathetic to claims that sellers of annuities would not be able to operate under the new rules, even noting that a commission-based compensation system was not the only option.

What Was Decided.

The decisions made by the court can be boiled down to the following:

1. The Department of Labor has statutory authority to interpret Title 1 of ERISA and to determine the conditions of any prohibited transaction exemptions it issues, and did not exceed that authority in issuing the fiduciary rule or imposing Impartial Conduct Standards on certain annuity sales under the Best Interest Contract (BIC) Exemption. 

In response to arguments that the fiduciary rule was an improper interpretation of the statute, the court stated that: “Nothing in the statutory text forecloses the Department’s current interpretation.”  Judge Moss went on to explain why the prior regulation (the “five part test”) was not the only permissible interpretation of the law:

“… there is a vast difference between accepting an existing interpretation of a statute and treating that interpretation as the only permissible one. NAFA’s efforts to support the latter approach prove too much: If taken to its logical extreme, it would suggest that every pre-1986 Treasury Department regulation interpreting the Internal Revenue Code was forever frozen in place when Congress reenacted the Code in 1986. That is not the law.”

2. The Department of Labor did not exceed its authority in regulating IRAs under the fiduciary rule.  Even though IRAs are not subject to Title I of ERISA, the Department of Labor may impose requirements of Title I of ERISA, such as the duties of prudence and loyalty, on those using exemptions for transactions involving IRAs.

3.  The Department of Labor’s requirement under the BIC Exemption that compensation be “reasonable” was not unconstitutionally vague because it is a commonly understood term. The court pointed out that other prohibited transaction exemptions and many IRS rules also use the term “reasonable compensation.”

4.  The Department of Labor was within its authority and not acting in an “arbitrary and capricious” manner in requiring that the BIC Exemption be used for fixed index annuity sales.

5.  The Department of Labor was not impermissibly creating a private right of action when it established requirements for the written contracts to be used for sales to IRAs under the BIC Exemption.  State laws, rather than ERISA, would govern the contract’s enforceability.

6.  The Department of Labor didn’t fail to do a sufficient regulatory analysis of the impact of the fiduciary rule on small business.

Where Do We Go From Here?

There are other challenges to the fiduciary rule waiting for decision in other courts, and judges in other jurisdictions may come out differently. This decision is expected to be appealed, so it is certainly not the last word on whether all or parts of the fiduciary rule are valid. However, the reasoning in this decision may provide a blueprint for the other courts issuing their decisions.

Since these cases were filed, some financial firms such as Merrill Lynch and Morgan Stanley have  announced how they plan to comply with the new rules, which undercuts the arguments put forward by plaintiffs in these cases that they will be unable to operate under the fiduciary rule.  And at least this one court appears to be saying that the fact that you don’t want things to change from the way you have always done them is not grounds for invalidating a regulation.

Of course, the election may well make all of this legal maneuvering moot, given Republican opposition to the rule.   However, even if the fiduciary rule is withdrawn or overturned by Congress,  it may not be possible to turn back the clock to a time when plans were unaware that many of the people who give them advice and sell them products were not doing so as fiduciaries.  There may be long-term changes in their hiring and supervisory practices.