Tips on Managing Investment-Related Risks
In the wake of the current economic downturn, we are receiving more and more calls from plan sponsors asking for tips on how to deal with unhappy participants and how to mitigate and/or transfer the risk of liability for investment-related losses in participant accounts. Most claims arise from either investment-related activities or the lack of prudent administrative processes and procedures. This article discusses methods of shifting or mitigating liability for investment losses as well as how to ensure that you are meeting your fiduciary duties in doing so.
Plan sponsors can delegate investment-related decisions to professionals, and the fiduciaries remain liable only for the prudent selection and monitoring of those providers. Although not common, an investment manager can be hired to select the investments that are offered to participants and to monitor the performance of those investments. By prudently selecting and monitoring an investment manager, the plan sponsor is relieved from liability for losses stemming from imprudent or underperforming investments.
The Pension Protection Act also provides two safe harbors that insulate plan sponsors from investment-related claims brought by plan participants – qualified default investment alternatives (“QDIAs”) and fiduciary advisers:
- The QDIA safe harbor protects plan fiduciaries from liability associated with the investment used where a participant fails to give investment directions. We recommend using an adviser to help with the selection and monitoring of a suitable QDIA.
- The fiduciary adviser safe harbor insulates plan sponsors from liability for investment losses in participant accounts where a fiduciary adviser is retained to provide investment recommendations to those participants (and where other regulatory requirements are satisfied).
While many investment-related functions can be delegated to third parties, it is important to note that the plan fiduciaries remain liable for the prudent selection and monitoring of service providers. It is, therefore, imperative for fiduciaries to undertake a prudent process and document their findings on an ongoing basis. For example, in many of the recently-filed cases concerning excessive fees, the plaintiffs allege that the fiduciaries failed to adequately investigate fee arrangements and alternatives. Documents evidencing negotiations between the plan and the service providers would generally have sufficed to demonstrate that the arrangement was prudently selected. The same would apply to the use of an advisor to shift the risk for investment decisions whether at the plan or participant level.
The Department of Labor (DOL) has produced two guides for fiduciaries to better understand their obligations with respect to fees charged by service providers. The guides are available through the DOL’s website at:
www.dol.gov/ebsa/pdf/401kfefm.pdf
www.dol.gov/ebsa/publications/fiduciaryresponsibility.html
Because fiduciary exposure often begins with participant complaints either in the form of phone calls or letters from participants, we also recommend retaining experienced counsel to assist with drafting responses to such inquiries and to document the issues considered as well as the basis for any proposed resolution. Proper documentation will go a long way in establishing that the fiduciaries’ actions were prudent and appropriate at the time they occurred.
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Reish Luftman Reicher & Cohen. All rights reserved. The REPORT TO PLAN SPONSORS is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.
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