6 minutes
Recent U.S. lawsuits illustrate importance of meeting fiduciary standards in employer-sponsored plans.
"Boeing 401(k) fiduciary breach lawsuit settled.”
“Lockheed Martin to pay $62 million settlement in 401(k) fee suit.”
“Supreme Court rules against Edison in 401(k) fiduciary breach case.”
In recent months, the headlines (such as those above) have been filled with examples of companies incurring significant penalties for breaching their fiduciary duty in the management and performance of their employer-sponsored retirement plans.
As the investment landscape becomes increasingly complicated and unpredictable—and these very public lawsuits drive employees to take a closer look at their retirement plans—credit unions are seeking more effective ways to minimize their organization’s fiduciary risk while still meeting the retirement needs of their employees.
Here are some key things to keep in mind.
Investment fees and performance are your two biggest risk areas. These have been the common thread in recent lawsuits and the areas where the plan sponsor is seen as having some level of control or responsibility to oversee.
| Do Plan Investments Meet ‘Prudent Man’ Standard? When making decisions about which investments to include in a retirement plan, the sponsor must follow the Prudent Man Rule. According to the Employee Retirement Income Security Act, this means “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.” |
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A well-written investment policy statement can help protect your credit union. Plan sponsors can’t predict future investment performance; that’s unknowable. Consequently, you must create a strong investment policy statement that articulates a process that allows you to identify prudent investments (see “Prudent Man,” left, for more about the Employee Retirement Income Security Act rule) and pinpoint and dispose of underperformers.
Creating a good IPS is a combination of art and science—it’s critical to strike a balance when it comes to specificity. The IPS should be explicit enough to provide concrete guidance without being so specific that it increases the likelihood of noncompliance.
Here is an example: A credit union’s IPS spells out that only mutual funds with a five-star rating from Morningstar (an investment research firm) should be included in its plan. If a fund that previously garnered a five-star rating slips to four stars, it could well be that the fund still meets ERISA’s standard for prudence, but the specificity of the IPS now means the plan must divest itself of this fund or risk being non-compliant.
The IPS should also spell out ongoing due diligence activities, such as how often the plan sponsor will monitor the plan’s investment performance and the activities of any service providers. ERISA doesn’t specify how often this should happen, but quarterly is preferred based on industry standards.
Stay on Top of Fees
Markets rise and fall. Portfolio managers perform—or don’t. These things can only be responded to, not controlled.
Fees, however, are another matter. These can and must be monitored and managed by the plan sponsor. It could be easy for an employee’s attorney to show that a sponsor has broken its fiduciary duty if it doesn’t manage fees.
The plan sponsor must determine whether plan fees are reasonable given current industry standards. What’s reasonable today might not be reasonable tomorrow and this issue has been the focus of many of the recent lawsuits. One company tried to use the defense that there was a statute of limitations on fee monitoring; the court found the plan sponsor had an ongoing responsibility.
Plan sponsors must monitor anything that could drive a change in fees. Two common causes are increased marketplace competition and plan growth.
As your CU’s plan reaches a certain asset size, you could qualify for lower investment fees. This re-pricing doesn’t typically happen automatically. As the plan sponsor, you’re responsible for monitoring it. You have a duty to ensure your employees are paying reasonable fees on an ongoing basis. This was the charge at the heart of Tibble v. Edison International (see below).
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Tibble v. Edison: Excessive Fee Ruling The Supreme Court rejected a lower appeals court ruling that agreed with Edison International that there was a six-year statute of limitations for a claim involving a plan investment, thereby confirming the plan sponsor’s ongoing responsibility to monitor investments and remove imprudent ones. Sponsors should also maintain records that provide evidence of their ongoing due diligence activities in the event of a claim. |
Know Your Limits
Ongoing monitoring of a plan’s investment performance and fees is a big job—especially given market volatility and the dynamic nature of the investment business.
If your credit union lacks the internal resources and expertise to perform investment due diligence activities, ERISA requires you to seek the assistance of a service provider—and “requires” is not an overstatement.
When choosing a resource to help with plan management, know that not all service providers play the same role or take on the same level of responsibility.
Brokers can be a good resource if the plan sponsor has appropriate internal resources to ensure the plan’s investments are selected solely with the best interests of its employees in mind and has the ability to monitor them on an ongoing basis.
Too often, a plan sponsor is under the mistaken impression that its broker is a fiduciary. Brokers are not. ERISA fiduciary advisors have “skin in the game” and are responsible for keeping on top of the state of the state, while sharing the risks associated with providing a plan to your employees.
Also note that a plan sponsor can never completely transfer fiduciary risk to a service provider. But a good one will share that risk while minimizing the chances it ever becomes actionable.
If your credit union decides to work with an ERISA fiduciary advisor, I recommend looking for the following credentials among its representatives:
- Chartered Financial Analyst: This is the gold standard. This person will have a deep education in the industry and strong expertise.
- Certified Financial Planner: This resource typically excels with participant-level education and administration.
- Accredited Investment Fiduciary: This signifies deep expertise in managing fiduciary tasks—such as due diligence activities designed to ensure investments are prudent and their fees are reasonable based on industry standards—and providing account level services and interacting with plan sponsors.
Brokers to Take on Fiduciary Role?
In early 2015 the U.S. Department of Labor proposed a dramatic rule change that would require brokers working with retirement accounts to take on a fiduciary role. The rule is touted as a way to cut fees and hold advisers to a fiduciary standard and could have an impact on various elements discussed throughout this article. Stay tuned!
Scott D. Knapp, CFA, is managing principal/investment consulting at CUNA Mutual Fiduciary Consultants, a subsidiary of CUNA Mutual Group, Madison, Wis., a CUES Supplier member and strategic partner.
