The Fiduciary Blog

Lessons from Litigation: Plan Sponsors in the Courtroom

By Ron Hagan, CEO

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)

Plan Sponsors are Following a Dangerous Course

By Lynne McAuley, West Region Director

I’ve noticed that vendors who sell products to retirement plans are using the word “fiduciary” a lot lately. Some vendors that publicly acknowledge their fiduciary duty properly educate their clients that a plan sponsor’s liability is much greater than a vendor’s.  A second group of vendors state falsely to their prospects and clients that they act as fiduciaries in place of plan sponsors. A third group of vendors proclaim loudly that they are not fiduciaries at all! How do plan sponsors make sense of this and what does it mean to them?

The Employment Retirement Income Security Act of 1974 (“ERISA”) defines a fiduciary to the extent that a person does any of the following:

1. Exercises any discretionary authority or control over the management of a plan, or management or disposition of plan assets;
2. Renders investment advice for a fee or other compensation, direct or indirect, over the disposition of plan assets, or has any authority or responsibility to do so; and
3. Has any discretionary authority or discretionary responsibility in the administration of such plan.

It should be obvious from the above definition, more than one person or entity can be a fiduciary at any one time. Normally, plans have several different fiduciaries. These include both insiders, such as company officers and plan committee members, as well as outsiders such as registered investment professionals. Where it is unclear if a person is a fiduciary, the courts apply a functional test under ERISA.  Persons in certain positions, however, such as the company employee who serves as the named fiduciary, trustee and plan administrator, are automatically considered fiduciaries.  Their liability may be shared by others but it cannot be off-loaded!

Frequently, corporate employers are confused about their fiduciary responsibilities. Some believe that once they hire investment advisors and investment managers, they no longer have further fiduciary responsibilities. This is simply not true!  The buck always stops with a plan sponsor’s key managers.

Another fallacy is the widespread belief that fiduciary duty focuses just on investment matters. Fiduciary duty under ERISA also involves many governance matters, claims administration, communicating with participants, as well as preparing required notices and disclosure to participants.

We hear from executives all over the country who are stunned to find that they are held legally liable to a set of fiduciary practices.  By increasing numbers, they are outraged that no one has made them aware of how to fulfill these practices.  They are learning that service providers are not on the hook for a plan sponsor’s fiduciary liability.  As a result, many of your peers want clarity from a truly independent source and are calling for unbiased fiduciary training and tools to satisfy their duties.

Quoted below are the actual claims made in recently filed lawsuits against executives like you:

• Participants incurred unreasonable fees and expenses.
• Fiduciaries caused the retirement plan to enter into agreements with third parties that charged excessive fees.
• Fiduciaries failed to inform themselves, understand, and monitor the various methods by which providers received payment and other revenue sharing arrangements.
• Fiduciaries failed to establish, implement, and follow plan oversight procedures.
• Fiduciaries failed to oversee the performance of co-fiduciaries.
• Fiduciaries were not entitled to the safe harbor protections of ERISA section 404(c).

For more clarity on your fiduciary duties and how to determine your exposure to liability, you may request a complimentary white paper entitled “Improve Your Pension Governance – Learn Where You Stand”.  Through the use of actual plan sponsor cases, the white paper demonstrates how Roland|Criss’ fiduciary governance system increases fiduciary protection on a before-and-after basis.  Click here to request a copy of the white paper.

Plan Sponsors Really Need The PPA’S Safe Harbor!

By Lynne McAuley, West Region Director

The recently enacted Pension Protection Act of 2006 (the “PPA”) can radically reduce a plan sponsor’s risk. It contains clear compliance rules. The Department of Labor has announced its plan to enforce them. This article discusses how the need for greater protection surfaced and how plan sponsors may acquire it.

"It is most important for leaders to conceive and articulate goals that lift people out of their petty preoccupations and unite them in pursuit of objectives worthy of their best efforts." John Gardner

The Global Fiduciary Standard of Excellence seeks to lift the conduct of Investment Stewards (i.e., plan sponsors), Investment Advisors, Investment Managers, and Record Keepers in a way that encourages their best efforts. It shows the way to a prudent long-term governance approach for plan sponsors. It also strengthens the fiduciary identity of Investment Advisors and Investment Managers, while improving the fiduciary support competency of Record Keepers.

FiduciaryPLUS™, which is a pension governance system built by Roland|Criss for Investment Stewards, follows the Standard in every detail. Roland|Criss also certifies Investment Managers, Investment Advisors, and Record Keepers that conform to the Standard.

"The leading rule for the lawyer, as for the man of every other calling, is diligence. Leave nothing for tomorrow which can be done today." Abraham Lincoln

If there is one practice area in the Global Fiduciary Standard of Excellence that retirement plan sponsors should focus on right now, it is the safe harbor element. Why? Serious events over the last two years behoove plan sponsors to think long and hard about their oversight of investment issues—particularly if participants direct their own investments.

In 1992, the final 404(c) regulations were enacted. Plan sponsors saw this as automatic relief from their risk related to participants’ investment decisions. Wrong! Not surprisingly, most sponsors ceased taking funding oversight seriously.

ERISA 404(c) is not a get out of jail free card—it is not an exemption from the fiduciary rules of ERISA. Fiduciaries remain responsible for choosing investment options, monitoring performance, monitoring fees and certain other duties. Ultimately, plan sponsors are liable for everything.

Prior to 404(c) many wondered if litigation was a real threat. Individual claims were usually small and plaintiffs could only win small settlements. Plus, there were few awards of attorney fees and no real plaintiff’s bar. Eventually though, class action lawyers discovered an opportunity "bigger than tobacco" as one attorney put it. This emerged through sponsors’ indifference to 404(c) compliance.

Now, there are large numbers of plaintiffs, identical causes of action, large potential damages and generous awards of attorney fees. The results of these developments were predictable. Litigation has become widespread. But plan sponsors are just not ready for the onslaught. It is time for sponsors to wake up. They really need the PPA’s safe harbor.

"Habits are first cobwebs, then cables." Spanish proverb

The PPA’s safe harbor is activated through a sponsor’s offering of a specific investment advice program to its participants through a "Fiduciary Adviser." At the same time, the PPA raised the bar on plan sponsor duties in an effort to provide more robust investment education and tools to participants.

The PPA’s liability exemption might sound like a reworked 404(c), but not so. The spirit and specifications of the PPA are to transform 404(c) from a passive education scheme that few qualify for, to an active toolset that requires an annual independent audit for activation. The PPA spawned a term to describe its new safe harbor feature. It is called an eligible investment advice arrangement.

The key step needed to qualify for the PPA’s safe harbor is the annual independent audit of a sponsor’s eligible investment advice arrangement or the "Arrangement Audit." Roland|Criss Fiduciary Services is the first firm to perform qualified PPA Arrangement Audits and is the leading PPA audit firm in the U.S.

There is no longer any reason for people who manage defined contribution plans to endure the high personal risk of the pre-PPA period. Eliminating a major source of risk is as easy as making a call to a Roland|Criss PPA specialist at 1-800-440-3457.

"There are no secrets to success. It is the result of preparation, hard work and learning from failure." Colin Powell

Plan Sponsor's Challenges in Today's Environment

By Lynne McAuley, West Region Director

"In describing today’s accelerating changes, the media fire blips of unrelated information at us. Experts bury us under mountains of narrowly specialized monographs. Popular forecasters present lists of unrelated trends, without any model to show us their interconnections or the forces likely to reverse them. As a result, change itself comes to be seen as anarchic, even lunatic." Alvin Toffler

With the above in mind, I realized that most plan sponsors must be whipsawed by the current state of anarchy. The tsunami brought about by Enron has left in its wake Sarbanes-Oxley and more recently the Pension Protection Act of 2006 (PPA), FAS rules around accounting for pensions and the U.S. Department of Labor (DOL) regulations on Qualified Default Investment Alternatives (QDIAs).

Employers are evaluating their plans due to the rule changes and their own business environments. I read a recent Hewitt Associates’ survey revealing that about 50% of human resource professionals plan to change service providers during 2007 or at least seriously scrutinize their relationships with service providers. That’s startling if one thinks about it. At least half of the plan sponsors are willing to at least consider shaking things up radically because they aren’t happy with their present approach.

Several universal themes emerged from this survey. Virtually all of the plan sponsors that responded will seek to measure their retirement programs’ total costs, participant services, and plan design.

How Should Plan Sponsors Proceed In A Protected Manner? This survey indicates that employers recognize that fiduciary issues are now front and center and will not fade away any time soon. Both in the defined contribution world and in the defined benefit world, the basic questions are being asked by plan sponsors.

Some basic questions are presented below.

• How can sponsors determine if the plan is adequately funded if they have not recently calculated expected inflows and outflows?
• How can employees adequately save unless they also go through a similar type of analysis?
• Can proper monitoring be performed if sponsors and employees do not know what fees are being paid and what services are obtained for the various fees?
• Can investment performance be sufficiently measured if funds are not appropriately compared to the correct peer?
• How can plan sponsors conduct a provider search and selection process that will address their concerns?
• How can they evaluate the responses they receive so at the end of the day, the sponsors don’t have buyer’s remorse and, worse yet, significant liability for breach of fiduciary duty?

To handle these fiduciary landmines, plan sponsors need a coherent process and a framework to perform meaningful evaluation. If they don’t they’ll continue to spin their wheels and bear unwarranted exposure to personal liability. Did I mention that fiduciary liability bears a personal consequence?

The good news is that plan sponsors are paying attention. The challenge for the sponsors is whether they use a model that shows interconnections so they can reverse some potentially negative and anarchic forces that are already in play.

"The art of progress is to preserve order amid change and preserve change amid order." Alfred North Whitehead

Complete Documentation is Vital for Your Protection

By Lynne McAuley, West Region Director

I would like to share some insights with you that I obtained while working as a Department of Labor ERISA investigator.  I am sure you can gain from my experiences.

My job was to figure out if the various fiduciaries, particularly the plan sponsors' executives, conducted themselves in a “prudent manner” and “solely in the interest of the participants and beneficiaries.“  That was such a nebulous standard, analogous to the late Supreme Court Justice Potter Steward’s description of pornography when he said, "I shall not today attempt further to define the kinds of material but I know it when I see it.”

Eventually, I knew it when I saw it.  Ultimately, I developed a twitch when I didn’t.

When I first began investigation plan sponsors in the early nineties, I remember my supervisor admonishing me to look at transactions to see if they passed the smell test.  When I was new, I often overreacted when:

• Plan sponsors ignored the first letter requesting documents
• Plan sponsors called and requested extensions
• Plan sponsors would not submit what was requested
• Employees would call our help desk and allege conspiracy theories and
• Receiving written responses that were cryptic, too literal or terse.

In most of the above instances, nothing was seriously wrong with the employee benefit plans.  However, I was required to complete limited investigations within three work days or convert the case into an investigation warranting more review.  Then I had no further time requirements other than not to annoy my boss and demonstrate results.  I then became motivated to find something wrong in order to justify that my time was well-spent.  When this happened, I began to chew into plan sponsors’ schedules.  At that point, sponsors often involved their lawyers and other service providers.

The moral of the above is that your initial response to the Department of Labor’s request is critical.

DOL investigators have to make quick decisions about how they will allocate their time.  If they receive complete, well documented adequately labeled responses that address the issue at hand, they can write up their reports and submit it up the food chain and close an investigation in fairly short order.  But if they are forced to request information from executives repeatedly or the explanations provided to their questions seem flimsy, they will expand the scope of the investigation. If they have doubts about how competently sponsors’ employees respond to the investigation, they start questioning their ability to run the plan prudently.

Most people think of themselves as both competent and reasonable. Under the circumstances presented, almost anyone would make the same decisions that they made. But most people also do not have stellar long-term memories.  Most investigations take place several years after the transaction takes place.  Can you remember in detail about decisions you made several years ago? Most likely, your recollections would be hazy.  Unless your decision making process was memorialized contemporaneously, it is easy to question your judgment after the fact as well as your veracity.  Even if the consequences of your decisions do not materialize the way you expect, if you record the analysis and decision making process as events occur, then it is much easier for investigators to put themselves into a fiduciary’s shoes.

I want to interject another word of caution. If the investigation broadens significantly, the Department of Labor does have subpoena authority.  In most instances, this authority has been supported by the courts. The practical implication is that the Department can obtain all documentation surrounding an issue, even internal email or other work products.  The records of your service providers can be obtained by subpoena as well, including their email records.

By imposing discipline on your decision making process and documenting how you arrived at your conclusions as a fiduciary, you will be demonstrating prudence and no one, not even the late Justice Steward could argue otherwise!