By Jeffery A. Acheson
Jeffery A. Acheson, CPWA®, CFP®, CPFATM, AIF®, CEPA® has 40+ years in the financial services and retirement plan industries, creating a value proposition that is an exceptional and diversified integration of credentialed education, experience-based knowledge and industry leadership. His fiduciary based business model focuses on enhancing his ability to be a trusted advisor to high-net-worth individuals, families, businesses and their mission critical employees, retirement plan sponsors and their participants through his private practice, Advanced Strategies Group. Mr. Acheson also serves as the Chief Business Development Officer for Independent Financial Partners headquartered in Tampa, Florida. He also volunteers within the National Association of Plan Advisors having served as the Chair of the Government Affairs Committee, a member of its Leadership Council and as President of the organization. He currently is an active member of the American Retirement Association’s Board of Directors and is Chairman of NAPA’s nonqualified plan certificate program and annual conference.
The Tale of Two Cities, Choose Your Path Wisely
On January 24, 2022, the US Supreme Court issued an opinion that will likely come to be viewed as a seminal moment in retirement plan menu construction, monitoring, and maintenance.
Failure to understand its implications by plan sponsors, appointed oversight committees, and contracted plan advisors will invite fiduciary liability exposure and lawsuits.
- The bad news, this Supreme Court’s unanimous decision likely will result in an increase in the number of lawsuits in the future making it more difficult for a fiduciary to win at the “motion to dismiss” stage of litigation, which will drive up potential litigation and settlement costs.
- The good news, this decision, as well as the Supreme Court’s prior decision in Tibble v. Edison Int’l [575 U.S. 523 (2015) (which ruled that “a fiduciary is required to conduct a regular review of its investments”)], provides a path of prudence to follow for fiduciaries in meeting their oversight duties and in turn, hopefully, being preemptive in fending off threats of litigation.
- The plaintiffs, who were participants in one of two 403(b) plans, took the familiar tact of claiming the responsible fiduciaries breached their duty by allowing the plans to overpay for investments (that is, expense ratios) and recordkeeping services.
- The university’s attorneys argued in defense that because the plans offered over 400 potential options, the participants could have chosen low- cost funds that met their needs and limited their expenses.
- The plaintiff’s attorneys countered that position with the argument that the plans’ oversight committee had a fiduciary duty to select and retain only prudent, reasonably priced investment options. In essence, the inherent argument was the menu of available options should have been continually monitored and managed so that all available options met acceptable standards of prudence, and those that didn’t should have been promptly removed
In essence, the plaintiff’s position was that of “quality over quantity” and the defendant’s position was “bigger is better” making the issue for the Supreme Court to decide: Who is ultimately responsible for selecting prudent investments for an individual’s account?
“Not So Fast My Friend”
The Supreme Court ultimately took issue with the Seventh Circuit decision in a manner that famed sports analyst Lee Corso takes every Saturday morning on ESPN’s College Gameday after hearing his colleague’s commentary about who is going to win a particular game. His response when he disagrees, which has become cliché in certain circles, is a retort of “Not so fast my friend!” before detailing his logic for a contrary opinion. In this case, the Seventh Circuit dismissed the appeal of an earlier District Court decision finding that the plaintiffs had failed to prove the case of a fiduciary breach, but ultimately, the Supreme Court disagreed, unanimously. “Not so fast my friend!” and here’s why.
The Supreme Court’s position rejected the premise a fiduciary could be excused from offering an imprudent option as long as there were other prudent options available. They instead retraced their steps to previous findings in the Tibble case [Tibble v. Edison Int’l, 575 U.S. 523 (2015)] that there is a duty to monitor and be held accountable for all plan investment options.
Of note, the Supreme Court did not rule the plaintiffs had sufficiently made their case against the Northwestern fiduciaries warranting a settlement. They instead vacated the dismissal and sent the case back to the lower court to reevaluate the claim and take into consideration the Supreme Court’s guidance, which included the following excerpt from Justice Sotomayer who wrote the opinion:
In Tibble, this court interpreted ERISA’s duty of prudence in light of the common law of trusts and determined that “a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.”
The opinion went on to fault the Seventh Circuit decision and included the additional following excerpt within the commentary:
The Seventh Circuit erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by respondents. In Tibble, this Court explained that, even in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options. If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.
Fortunately, the opinion also did go on to say:
Because the content of the duty of prudence turns on “the circumstances… prevailing at the time the fiduciary acts, the appropriate inquiry will necessarily be context specific.” At times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard in the range of reasonable judgements a fiduciary may make based upon her experience and expertise.
This language seems to reaffirm the guiding principle of prudent fiduciary oversight. The principle that adherence to documented process and procedure when arriving at a fiduciary decision based upon the facts and circumstances of a particular situation, is still the relevant underpinning of a defensible position.
Can I Phone a Friend?
The popular television gameshow “Who Wants to be a Millionaire” that aired some years ago afforded the contestant the opportunity to phone a friend when finding the need for help with a particular question.
Given the gravity of this Supreme Court decision and its associated legal and functional implications for fiduciaries, I felt compelled to “phone a friend” in the esteemed Barry K. Downey who is a partner with Smith and Downey, P.A. and specializes in ERISA, employee benefits, and executive compensation matters. I asked Mr. Downey to provide what he would consider the essential take-aways of this decision and what actions he would recommend. Following is the guidance he provided:
While procedurally complicated, the essential takeaways from the Supreme Court’s unanimous decision are:
- Simply providing a diverse menu of investment options, providing low-cost options (along with higher-cost investment options), and giving participants complete discretion over the selection of investment options, is not sufficient to satisfy ERISA’s fiduciary duty of prudence.
- Determining whether plan fiduciaries failed to meet their ERISA duty of prudence requires a “context-specific” inquiry of the “continuing duty to monitor investments and remove imprudent ones.”
- Fiduciaries must conduct their own independent evaluations to determine which investments may be prudently included in the plan’s menu of investment options.
- Offering too many investment options (over 400 in Tibble) can cause participant confusion and poor investment decisions, which can result in a failure to meet ERISA’s fiduciary duty of prudence.
- If the fiduciaries fail to remove an imprudent investment option within a “reasonable time,” the fiduciaries fail to meet ERISA’s fiduciary duty of prudence.
- Fiduciaries must apply these same standards to recordkeeping fees.
- These determinations are all made based on “the circumstances… prevailing” at the time the fiduciary acts
Note: We see, as an example, that many plan fiduciaries simply add “ESGs” to investment lineups and assume it is prudent because there are other funds in the same investment category that clearly meet the prudent selection requirements. The Supreme Court decision states clearly that all funds, including ESGs, must stand on their own as prudent investment options.
We continue to advise that the fiduciaries of retirement plans, and health and welfare plans, can protect themselves and their plans against these types of claims by taking proactive actions and documenting that these actions have been taken.
- Ensure the plan sponsor has a very clear fiduciary apparatus (for example, a plan administrative or oversight committee) in place to oversee and discharge all ERISA duties and best practices.
- Ensure documents and processes have been implemented that govern vendor selection and monitoring, investment and vendor fee review, and investment selection and monitoring.
- Ensure that the documentation and processes include a regular review by the fiduciaries of the investments, vendors, and fees.
- Ensure that the plan fiduciaries’ decision making behavior conforms to the controlling documentation and processes.
- Schedule regular legal training for plan fiduciaries regarding their responsibilities and the steps they should take to best position the employer and the fiduciaries on these issues.
- Review investment provider and other service provider agreements, insurance coverage, and indemnification provisions for adequacy.
- Periodically engage in an independent fiduciary review of plan fees and vendor performance.
- Carefully review and revise minutes of fiduciary committee meetings to ensure accuracy and to document that plan fiduciaries are following the con- trolling documentation and processes.
- If there are concerns about prior years, take corrective steps to ensure appropriate risk management.
Thanks for taking my call and being my lifeline Barry. Now, back to the show!
In another piece on this topic authored by the ubiquitous and legendary Fred Reish that posted to the Hartford Funds website in March of 2022, his concluding thoughts included two bullet points that bring additional perspective to this column. Those bullet points were:
- Mutual fund windows and brokerage accounts are not considered Designated Investment Alternatives (DIAs) and, as such, the investments in those accounts do not need to be prudently selected and monitored.
- However, a small account or window may not pass muster. In one case, the Moitoso case, the trial court held that a “window” of approximately 100 funds was not a true mutual fund window, but instead it was additional designated investment options. There isn’t a definition that describes where that line is drawn, but thousands of options are clearly a window, while a few hundred may not be.
What’s a Prudent Expert to Do?
As mentioned at the beginning of this column, the future will be a tale of two cities with some fiduciaries taking this new law of the land seriously and preemptively acting accordingly in the execution of their fiduciary duties with others being negligent (or oblivious) at their own peril. Some fiduciaries may even simply move to a small menu of the lowest-cost passively managed index options they can find as a risk mitigation measure without concern for participant demographics, planning needs or sophistication. Before dismissing this approach out of hand, keep in mind this is utilized by the Federal Government’s Thrift Savings Plan.
Others will be determined to be more thoughtful in their process, taking into consideration the customization needs and sophistication of the plan participants. One such person who believes this path forward is optimal is a respected colleague of mine, Jeffrey Cullen, MBA, the Managing Partner of Strategic Retirement Partners who collectively advise over 1000 plans holding approximately $17 billion in assets.
When I asked Jeff for his perspective, his passionate response was:
In the early 2000s, Advisors were hired for our investment acumen. Post the 2008 crash, that changed. Financial assets have gone straight up, save a few small blips, for 10+ years. Plan sponsors, consultants, and participants alike have been lulled to sleep and fooled into believing investments have been commoditized and don’t matter anymore. Public fixed income markets are broken which means that traditional asset allocation is also broken. Seeking out non-equity asset classes that provide diversification, previously achieved by holding bonds, is paramount. I believe when we look back five years from now, the plan sponsors, consultants, and participants who will have had the best outcomes, investment-wise, are those that had a rigorous process for selecting quality active managers, alternative asset classes, and incorporated both, to a meaningful extent, into their asset allocation vehicles whether they be managed accounts, target date funds, or custom models. The consultants that make the hard choices now to adjust their strategies and go against the “lower fees are always better” trend will have a competitive advantage in the coming years. Going forward, investments matter a lot.
The challenge for all fiduciaries, regardless of their perspective and conviction, will be to deliver, adopt, or approve a process that drive a defensible and definitive differentiation between prudent and imprudent, knowing choices made will still be deemed subjective and be debated, even between “prudent experts” familiar with such matters and acting with a high standard of care, diligence, prudence, and skill required of them. There will be no perfect science or bright line test to rely on. However, in my next column, I will detail a framework and methodology of investment selection and monitoring analysis that will hopefully provide food for thought and structure helpful to others. The bottom line, the Supreme Court has upped the ante for prudence by clearly reaffirming their perspective that the law of land for ERISA fiduciaries is they must prudently select and monitor “ALL” of the Designated Investment Alternatives (DIAs) made available to plan participants. ■
Copyright © 2022 CCH Incorporated. All Rights Reserved.
Reprinted from Journal of Pension Benefits, Summer 2022, Volume 29, Number 4, pages 39–42, with permission from Wolters Kluwer, New York, NY, 1-800-638-8437 www.WoltersKluwerLR.com