Lessons from Litigation: Plan Sponsors in the Courtroom

Today's post, and the next few that follow, focus on the results of legal action against retirement plan sponsors and their key managers.  The sizes of the sponsors involved range from small privately held companies to large publicly traded companies.  Roland|Criss is serving as an advisor to legal defense teams on investment and administrative fiduciary standards of care.  Knowing this, plan sponsors ask me frequently what they can do to avoid the suffering that many fiduciaries are enduring.  I tell them that much of the pain is unnecessary, but happening just the same, due to ignorance of how to manage their fiduciary duty the right way.

Clues about the threats to mid-managers’ and senior executives’ personal assets are starting to emerge from cases working their way through the courts and the Department of Labor.  An often repeated outcome in the growing number of breach of fiduciary duty cases is defendants’ shock at learning how much they do not know about their legal duty.  This combined with a lack of proof of past conformity to fiduciary standards of care spells big trouble.

The Troubling Culture

Fiduciary risk has emerged as a hot topic in business circles.  Quick to seize on the fear it evokes, many investment consultants have learned that they can sell more business if they say that they takeover fiduciary liability.  This method of selling is growing even though federal law prohibits such a thing.  It is creating a troubling culture in which you should not get caught.

Anyone who serves in a fiduciary role is on the road to trouble when they buy into the idea that they can hire someone to handle their duty for them.  The defense cases in which we are participating reveal that a high percentage of executives trusted the false notion that their investment consultant or record keeper assumed all fiduciary liability.  On a broader scale, this indicates that ignorance among fiduciaries, combined with willful deception by some vendors, will likely lead many more executives into a courtroom.

A Look into the Abyss

If after checking with your investment advisor, pension consultant, and/or record keeper you believe that it, or they, have your fiduciary duty covered…call for help-immediately!

I have looked into the litigation and DOL enforcement abyss.  It is populated with business managers and executives who also thought that their vendors were “the fiduciary.”  Abdicating your role for even the briefest period will put you on a slippery slope that plaintiff lawyers and federal regulators will eagerly exploit.

Getting on a Safe Pathway

The most threatening condition for plan sponsors seen in current lawsuits and DOL action is the lack of an ERISA qualified fiduciary management system.  That is because investment vendors and record keepers, on whom most executives depend for advice, have a serious conflict of interest with plan sponsors.  As a result, they are unable to offer plan sponsors an independent and unbiased management system.  Vendors know this but most sponsors do not.

What should you do?  Get quality fiduciary training from an unbiased professional advisor.  It should not sell investment products but it should be highly skilled with investment analysis.  The experts it assigns to your account should have earned the AIFA^® designation.  The firm should be experienced with investment fiduciary audits and litigation defense.  This is no time to work with a novice.

Roland|Criss offers fiduciary training.  We also provide an added level of protection with our investment governance review.  It produces the ISP Rating^™ (“Investment Steward Practices Rating^™”).  This is a quick way to know how your practices align with the standard against which lawsuits are now being decided.  Call us for more information at (800) 440-3457 and learn how you can know your ISP Rating^™.

Here are some excellent resources that can help you:

Fiduciary Duty: The Six Most Critical Mistakes to Avoid (Roland|Criss Fiduciary Services)
Prudent Practices for Investment Stewards (Fiduciary 360, AICPA, Reish Luftman Reicher & Cohen)

Comments

[Alison W.]

This article confused me. What do you mean people assume liability? Aren't you referring responsibility? A fiduciary may absolutely delegate responsibility per ERISA 405(d)(1), but you suggest it cannot be done and you confuse the issue by using the word "liability." What are you talking about??

Please clarify.

[Ron Hagan, Sr.]

Alison's comment reflects the widespread confusion that exists among plan sponsors over who is liable when certain fiduciary duties are delegated to "prudent experts" under ERISA.

This confusion was reflected in the findings of the Department of Labor's Working Group on Fiduciary Training and Education. It found that the vast majority of persons who serve as ERISA fiduciaries fail to grasp the personal liability that comes with their position.

With regard to investing plan assets, a fiduciary (i.e., a plan sponsor's employee charged with its plan's oversight) must act as any prudent and knowlegable person would act under similar circumstances, taking into account all relevant factors as they appeared at the time of the investment decision, not in hindsight. This is generally referred to as the "prudent expert rule."

Said the court in Marshall v. Snyder, 1 E.B.C. 1878 (E.D.N.Y. 1979):

...the framers of ERISA Section 404(a()1)(B) established a standard of conduct based on a measure of how a prudent man in a like capacity (administration of employee benefit plans) and familiar with such matters would act. Thus, ERISA's prudence test is not that of a prudent lay person but rather that of a prudent fiduciary with experience dealing with a similar entrprise. [Marshall at 1886]

Under ERISA the fiduciary is held to the so-called prudent expert rule even if he lacks the capabilities required to carry out his fiduciary responsibilities. Under these circumstances, he must engage experts who have the requisite skill, knowledge, and experience needed by the plan. [Donovan v. Mazzola, 716 F.2d 1226, 4 E.B.C. 1865 (9th Circ. 1983)]. However the fiduciary retains the ultimate responsibility for the decison.

Fiduciary decisions will be scrutinized based on the care the fiduciary took in investigating the facts beforehand. In Donovan, the court stated that the test for prudence was...

whether the individual trustees, at the time they engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment. [Donovan at 1232]

The duty to investigate inherently presupposes an understanding of the fiduciary's duties, and failure to be aware of one's duties can constitute fiduciary breach under ERISA.

[Bob Graziosi]

Ron,
I agree with most of your post except for the part regarding the ability to transfer fiduciary liability.

The PPA, through the creation of the "fiduciary investment adviser", has enabled plan sponsors to transfer their investment related fiduciary liability to an authorized third party. I work for a Registered Investment Adviser who expressly takes on this liability. The plan sponsor, of course, still maintains the fiduciary liability over the selection of the adviser. To assist plan sponsors in displaying their due diligence, we undergo our own audit each year with an independent ERISA attorney who reviews our practices and confirms that we follow the guidelines set out in our IPS regarding the selection, monitoring and replacement of funds.

You are correct in that many companies who make the claim of providing fiduciary protection actually do so to a limited capacity if at all. Typically, they will offer plan sponsors a list of fund companies or fund managers to choose from. By keeping the plan sponsor in the selection process, the provider limits their own liability. My firm actually makes the fund selections for the plans we handle, not the plan sponsors. We insulate them from stepping back into fiduciary liability exposure.

As for the conflict of interest that you mentioned, we are paid on a percentage of assets only. We are not limited to proprietary fund arrangements or have any special arrangements with fund families. We provide full fee discloaure and all 12b-1 fees and revenue sharing arrangements are paid back to the plan. Since our fee is not based on what kind of paybacks we get from fund families, we can base our investment decisions on what is best for the plan participants instead of what generates the most income for the firm.

There ARE firms out there that approach this business in the right way. Our goal is to provide plan sponsors with a solid menu of investment options, provide fiduciary liability protection, on-going employee education and value-added investment services. What better way to keep a client for life than provide quality service at competitive prices?