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.