Legislation or Litigation

On April 14, 2006, a Federal appeals court held that a benefits plan trustee complied with his fiduciary duty by selecting conservative investment funds in the plan, monitoring the performance of the selected funds, providing participants with information relating to the selected funds and giving the opportunity for participants to change funds periodically throughout the plan year. Fiduciaries such as qualified plan trustees are continually mindful of their vulnerability to being sued for a breach of fiduciary duty in connection with a myriad of their actions related to plan operations.

At this time when the Senate and the House are discussing pension law, how to ‘reform’ the system and specifically proposing to eliminate safeguards against conflicts of interest, many who actually work in the pension world have to themselves why it is necessary to fix the existing law. There will be a myriad of different answers, but many could agree that the manipulation of the system by savvy practitioners has gone too far in several directions.

The House wants to revoke the prohibition that restrains those who may potentially benefit financially from providing investment advice. The proposed change would allow investment funds who manage 401(k) plans to also provide financial advice to 401(k) plan participants. Reading about this idea created countless questions about fiduciaries and their true relationship to qualified plan participants.

Working closely with accountants recently has created a particular awareness of the effect of the Sarbanes-Oxley Act and the seemingly catastrophic misdeeds of plan fiduciaries. As defined in Black’s Law Dictionary, a fiduciary is “… a person holding the character of a trustee or a character analogous to that of a trustee in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires. A person having duty, created by his undertaking, to act primarily for another’s benefit in matters connected with such undertaking.” The standard of a fiduciary appears fairly simple – duty first – self second. Yet, how often do fiduciaries attain that standard – but, more importantly, how often is less than that acceptable?

Hypothetically, each time a fiduciary fails to meet the required standard there is a potential risk of litigation. Breach of fiduciary duty has been in the news far more often recently than in the last “thirtyish” years of ERISA. It is difficult to believe that this increase is directly proportionate to the way fiduciaries have relaxed their standards of care, but rather, recent breach of fiduciary duty actions have been highly publicized leading to more intensive scrutiny and more frequent and specific regulation. All of this action has been cause for discussion in the press, boardrooms and Congress.

Historically, concern relating to fiduciary risk in operating pension plans has been minimal. The recent general publicity has caused employee/participants to become more aware of their pension plans. On slow days, 401(k) plans are hot news and often feature on cover pages of popular magazines as never before. These same employee/participants are relying on their plan fiduciaries to make the right choices when selecting plan investments. They expect and have a right to expect that the fiduciaries who are making the choice of available investment choices actually review the cost structure of those investment choices. They want to know that the fiduciaries ask thoughtful and often difficult questions to ensure that the performance and fees are appropriate and consistent with prudent standards required of someone making those choices for others (a fiduciary). Decisions must be without regard to personal gain and should be a squeaky clean arms length transaction.

The best guidance for today’s fiduciary is to remember their responsibility as a fiduciary by using prudent judgment when selecting the investments available in the plan. Participants have a right to receive the best investment options and one role of a fiduciary is to provide unbiased investment decisions. Operating within the scope of prudence, it makes sense for a fiduciary to ask the following questions.

How often should fiduciaries review their plans’ investment choices with the vendor? What kinds of issues should be addressed? What are appropriate charges and what performance is acceptable? How does benchmarking work for 401(k) plans? What constitutes a conflict of interest? Who is helping participants to understand the complexity of investing their retirement nest egg? All are questions we may not want to ask because we may have been operating up until now without inquiry. Do the answers reveal something we would prefer to remain hidden or is it time to face the answer with the attitude of ‘better late than never’?

In every facet of life, there are questions that have answers that are easy and those that we must prepare ourselves to hear. The questions above pose potential answers that may be very hard to hear and harder yet to deal with. The most important question is “what could happen if we don’t ask?”

For more information, contact Sylvia Bell, JD, Senior Manager of Employee Benefits Services, at 412.281.2501, ext. 335.