Many
are concerned with the difficult market environment in 2000 and early 2001, and
the possible repercussions for employers who sponsor 401(k) plans. As we have
now recently finished the worst first quarter market drop in decades, this
issue of fiduciary liability is screaming for attention.
Take
the case of Sam Blodgett, a civil engineer in Albany, N.Y. USA Today wrote
about how he now has to work four years longer to make up for a 60% loss to his
retirement portfolio! And this case is not necessarily extreme; in just the
last few months, scores of retirement plan participants have lost upwards of
1/3 of their portfolios.
And
now the sharks are beginning to circle. We are seeing signs that legal firms
are looking at disgruntled plan participants who have a bone to pick with the
investments offered in their company retirement plan. Ian Kopelman, who is the
co-head of the employee benefits group at the Chicago Law firm of Piper,
Marbury, Rudnich & Wolfe stated "...When the market was going up, it didn´t
matter much for private attorneys...if a lawyer is fortunate enough to find a
case where investments went down, that´s easy because you´ve got some damages..."
Compounding
the problem is the fact that service providers play a role in selecting the
investment options offered in these plans, yet rarely will take the legal
responsibility for those selections. In addition, an interesting study
recently showed that, depending on the provider, certain biases could be
expected in those investment selections and subsequent education. For example,
plans run by investment companies have the largest allocation to equity
investments followed by insurance companies while banks have the lowest
allocation to equities. And the overall trend is to offer more and more
investment options all together.
Moreover,
what even a few years ago would be considered unthinkable; some providers are
now offering extremely narrow and risky investment options. Take Fidelity
Investments: Just last month, they issued a press release announcing the
availability of their 40 sector funds for 401(k) plan participants. Included in
this list are such options as their select biotechnology, computers, gold and
technology funds.
Yet,
while the suppliers of retirement plans throw more products at their clients,
the end users (employee participants) are becoming ever more confused. Nearly ½
of the participants in the Wiese Research Associates survey couldn´t name any
of the investment options in their 401(k) plan. And only 30% described
themselves as very knowledgeable regarding 401(k) investment options.
So
this is where we stand today: a hostile market environment, providers
scrambling for new ways to attract clients and employees who are as confused as
ever. What is a well-intentioned employer to do?
It
has always been our position that, first and foremost, plan sponsors must
have a process in place to manage their retirement plan investments.
Remember, case law to date has not focused on investment results; it has
focused on the conduct of the fiduciary. In other words, it is process, not
performance that determines liability. In the fall 1999 issue of this
newsletter, we went into some detail on the process demanded of fiduciaries
under ERISA. So while we will not repeat ourselves at length here, let us
briefly summarize this process.
We
would also like to comment on 404(c). Many feel that by having a retirement
plan that is in ´compliance´ with section 404(c) of ERISA, there is no danger
of liability for participant investment decisions. While this is true to a
certain extent, make no mistake that there are significant limitations to such
a statement. The fact is that having a 404(c) plan in place does not relieve
the plan sponsor of the liability for the choice of investment options offered.
The simple reality is that if investment options are offered that a prudent
expert would not recommend, the plan sponsor may well be liable for any losses
suffered by the plan participants (One would be hard pressed to get The HCM
Group to offer a gold or technology mutual fund in a 401(k) plan).
The
overriding criterion plan sponsors need to be conscious of is that their
conduct is measured by the "prudent expert" rule under ERISA. And unless their
provider states in writing that they are a qualified investment manager and
discretionary fiduciary, the plan sponsor must live up to this standard on
their own! It is process, not performance that counts. Now is the time for plan
sponsors to put that process in place.