Process Can Trump ERISA Fiduciary Litigation

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Process Can Trump ERISA Fiduciary Litigation

Ask any ERISA lawyer and they will tell you that fiduciary litigation is out of control. The recent 11 cases involving BlackRock target date funds are Exhibit A for that statement. Without digging deep into the facts, it is easy to say that the BlackRock funds have solid performance, and yet, plan sponsors are being sued. One easily would have that thought that these funds were unassailable investment selections.

The litigation is costly, time consuming and a distraction from executing business strategies. A survey of recent activity also shows it’s impossible to predict paths to success.

Lawyers like to extract principles from cases and offer advise based upon these principles.  Fiduciary litigation is all over the map, there is little consistency. Given the deluge of cases, some industry experts predict that the system may implode under the unrelenting volume.

Chaos breeds opportunity. Independent fiduciaries may prove to be the bulwark against this wave of litigation.

However, the role of independent fiduciary is not a well understood concept in the industry these days. Independent fiduciaries are neither investment consultants or advisors nor are they lawyers providing legal advice. Instead, they can fulfill the role of the investment fiduciary of a plan sponsor. Armed with sophisticated investment analytic tools, a deep expertise with respect to the model of fiduciary prudence, and devoid of conflicts of interest, independent fiduciaries can lift a risky burden off the shoulders of retirement plan investment committees.   

While the recent wave of litigation has produced few consistent legal principles for guidance, there are two old chestnuts of ERISA litigation:  1) courts are loathe, in hindsight, to second guess investment decisions, and 2) fiduciaries are obligated to exercise procedural prudence –e.g. a prudent process. The core competency of investment fiduciaries — prudence — relies upon this well settled case law.  

An independent fiduciary firm with investment product expertise and steeped in best practices of procedural prudence would likely prevail against today’s throw-it-against-the-wall-and-see-what-sticks litigation environment. Plan sponsors should avail themselves of this expertise regarding their pension plans and 401(k) retirement plans.

Challenging times require new responses. The time has come for plan sponsors to leverage the core competency of independent fiduciaries: prudence.  

 

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Fiduciary NewsLetter

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Fiduciary Newsletter – Summer 2022

2022 has been a very busy year for news in the retirement world.

To recap what we have seen over the past several months, we are providing retirement plan fiduciaries and the committees they serve on with this brief summary of the issues of the day, and our thoughts on how plan fiduciaries should be approaching them.

If you have questions or concerns about how these issues will affect your plan or your role as a plan fiduciary, please don’t hesitate to give us a call!

Lifetime Income/Annuities

As the passage of the SECURE Act has paved the way for annuities in retirement plans, participants are increasingly interested in adding a lifetime income component to their 401(k) plan. And you can’t really blame them. Creating a steady income stream for their golden years provides a great deal of comfort and security.

The investment and insurance industries are responding by building and rolling out new investment strategies that incorporate annuities and lifetime income options. Firms like Blackrock, Nationwide and Annexus have already brought these strategies to the market and as retirement plan fiduciaries begin to assess this trend, we can expect to see these products playing a more prominent role in 401(k) plan line-ups in the years to come.

So what does this mean for the fiduciaries who oversee these plans? Well, on top of everything else on their plate they will now have to acquire a new skill set in understanding and analyzing insurance contracts from a fiduciary point-of-view. That’s right, annuities are not investments. They are insurance contracts that are designed to last a lifetime. Building this skill set and getting this right is imperative. And for retirement plan fiduciaries, it adds to the already heavy burden of overseeing a retirement plan.

To get our take on this issue and what we believe retirement plan fiduciaries need to be aware of, read our article that was recently published in BenefitsPRO.

If you are interested in adding lifetime income options to your retirement plan, Harrison Fiduciary can help. Please feel free to give us a call to discuss how engaging with an independent fiduciary can lead to better outcomes for plan sponsors and plan participants!

 

Cryptocurrency

Everyone is watching and wondering where crypto is heading, but it’s safe to say not everyone understands it. Nonetheless, it’s inching its way towards the retirement industry and fiduciaries should take note. Recently the nation’s largest 401(k) plan provider, Fidelity, has announced that they will soon be rolling out the option to invest retirement assets in Bitcoin. The DOL has said they have “grave concerns” and they have cautioned plan fiduciaries to exercise extreme care before they consider adding cryptocurrency options to a 401(k) plan. You can read the DOL’s Compliance Assistance Release for plan fiduciaries here.

For a multitude of reasons, we believe retirement plan fiduciaries should hold off here as crypto assets have not provided audits and other standard modes of verification. From our fiduciary perspective this disqualifies them as prudent investments. To dive deeper into the issues plan fiduciaries need to know about cryptocurrencies and specifically, Bitcoin, read our article that was recently published in Investment News.

ESG

Last fall the DOL issued a proposed rule that would amend its investment duties regulation related to the use of ESG factors in selecting appropriate investments for ERISA qualified plans. The new rule would explicitly give a green light to plan fiduciaries looking to incorporate ESG into their plans. It’s a significant change from the position of the DOL under the previous administration which limited a fiduciary’s ability to consider ESG factors. Politics is playing a big role here, with Democrats in congress praising the rule, while Republicans have asked the DOL to withdraw the rule, saying that it effectively mandates consideration of ESG factors in investment decisions. The comment period has been closed and as the final rule is still pending, retirement plan fiduciaries wait.

Irrespective of the outcome, Harrison Fiduciary has weighed in on some if the issues and pitfalls that plan fiduciaries need to be aware of when considering how to integrate ESG options into retirement plans. Read about it in our article that was recently published in Plan Sponsor.

Target Date Funds

TDF’s continue to be the fastest growing investment strategy within retirement plans. While they are a useful and beneficial tool to optimize retirement savings over an investors time horizon, plan fiduciaries should be diligent in their selection. While they are often marketed as simple “set it and forget it” options for plan participants, they are actually quite complex. And we are now seeing lifetime income options being added to them, increasing their complexity. Not every TDF fund is appropriate for every plan and fiduciaries hold a duty to perform their due diligence when selecting TDF options for their plans. For fiduciaries analyzing their TDF line-up, we have outlined a number of issues that should be considered here.

As trends in ERISA litigation continue to plague plan sponsors, the recent Supreme Court decision in Hughes v. Northwestern University leaves the door wide open for future class action lawsuits that focus on Target Date Funds. Read our article on this that was published earlier this year in BenefitsPro.

And don’t forget, last year the Government Accountability Office kicked off an investigation into TDF’s and how they are used in retirement plans. It’s anyones’s guess when we will see the results of that investigation but we can expect they will also accompany new guidance for plan fiduciaries on their use.

As an independent fiduciary, we offer a comprehensive TDF analysis and review for retirement plans. If You would like to lean more pease visit www.harrisonfiduciary.com or give us a call!

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Cryptocurrencies: Not Yet Ready for Primetime

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Cryptocurrencies: Not Yet Ready for Primetime

In March of 2022, the Department of Labor issued a Compliance Bulletin that raised significant questions about the appropriateness of investing in cryptocurrencies within ERISA qualified retirement plans. In the meantime, Fidelity Investments recently announced its intention to offer a facility that would enable investments in Bitcoin within 401(k) plans. So what should retirement plan fiduciaries be doing when it comes to cryptocurrency? Harrison Fiduciary’s Mitch Shames discusses this in his recent article in Investment News.

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Plan Sponsors Must Focus on Cybersecurity - How Broad Are Their Fiduciary Shoulders?

Cryptocurrencies: Not Yet Ready for Primetime

ESG Doesn't Trump Fiduciary Principles

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Let’s talk about the best options for you and your plan participants.

Meeting the Demand for ESG Investment Options

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Meeting the Demand for ESG Investment Options

Surveys show that employees and plan participants, particularly millennials, are requesting investment options in their 401(k) plans that implement ESG – Environmental, Social & Governance – investment principles. This motivation springs from a desire to use retirement assets as a force to address global and societal issues such as climate change, work-force issues, pay equity and others. ESG is gaining in popularity and momentum.

In an era of labor shortages employers need to be focused on and attentive to, the sensitivities of their employees. Human resource professionals bring extensive experience and best practices (including market-based best practices) to these challenges.

However, when it comes to using retirement plans to address employee satisfaction, care needs to be taken not to run afoul of ERISA principles. In other words, often decisions affecting employees and the work force are evaluated against the business judgment rule. Great latitude is extended to corporations under the business judgment rule.

Once ERISA qualified plans enter the picture, chances are high that the plan sponsor is stepping into the world of ERISA and the fiduciary standard of care. Specifically, plan sponsors who want to adopt ESG investment principles should do so NOT because of employee pressure, but rather because ESG is a prudent investment tool and is in the best interest of plan participants.

Note, meeting employee demands and executing prudent decisions are not mutually exclusive.  With due care, both goals can be achieved. It is critical however, that the decision always be grounded in prudence.

Therefore, before adopting ESG principles (whether out of employee pressure or otherwise) fiduciary committees must undertake (and document) a review of the benefits of ESG screens.  Furthermore, ERISA counsel should be consulted to assure that the any proposed changes reflect procedural prudence by following the processes set forth in the plan documents.

Significant energy can swirl around topics such as ESG. Notwithstanding the economic temptation to meet employee pressures, extra care needs to be taken when plan sponsors are acting in a fiduciary capacity. For the plan sponsor, half the battle lies with remembering that it is acting in a fiduciary context, the other half lies in seeking the appropriate counsel.

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Plan Sponsors Must Focus on Cybersecurity - How Broad Are Their Fiduciary Shoulders?

Cryptocurrencies: Not Yet Ready for Primetime

ESG Doesn't Trump Fiduciary Principles

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ESG Doesn’t Trump Fiduciary Principles

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ESG Doesn’t Trump Fiduciary Principles

For plan sponsors, ESG investing is a hot topic of discussion. However, like #BlackLivesMatter and #MeToo, ESG can be seen as a highly politicized buzzword that often means different things to different people. Retirement plan fiduciaries should dig below the surface.

Lawmakers on Capitol Hill have introduced legislation that would amend ERISA and allow for the offering of ESG options, and for the consideration of ESG factors within retirement plans. Importantly, the proposed statutory language offers that while ESG considerations maybe taken into account, traditional fiduciary principles (such as, prudence, acting solely in the interest of plan participants, exclusive purpose of providing benefits, defraying expenses, and diversification) still apply.

In other words, fiduciary principles can’t be sacrificed in favor of a push towards ESG investing, simply because ESG is a hot topic

However, we maintain that best practices concerning ESG are not at odds with fiduciary principles but promote and advance fiduciary obligations. ESG factors can be included in the investment analysis process – but should not be the purpose of it.

It was just over 15 years ago when the term ESG Investing entered the collective consciousness of investors. Fast forward to today, and we still don’t have a universal framework for its implementation. It can feel like a gray area for investors, so it’s worth defining what we are actually talking about when we use the term ESG. Basically, it involves incorporating Environmental, Social and Governance factors in the analysis of investments because they are relevant to an investment’s expected performance.

ESG however, is not to be confused with “Socially Responsible Investing” (SRI) which often seeks to screen out investments that derive revenues from morally or ethically questionable activities or countries. SRI came first and was more widely adopted by even the largest institutional investors from the beginning. Many public pension plans, often prompted by state legislatures, avoided and eliminated investments with ties to Iran or Sudan for instance. Some, like CalPERS, decided in 2000 that they would divest from all tobacco stocks which, according to the Wall Street Journal, cost them about $3.5 billion over the course of the next 16 years. (https://www.wsj.com/articles/calpers-dilemma-save-the-world-or-make-money-11560684601)

The presumption here, is that directing investments away from politically or socially objectionable entities, will move society towards a better place. Maybe, maybe not. But at the end of the day, SRI investing isn’t necessarily about assessing risk and return.

ESG, on the other hand, most certainly can be implemented with the intent of improving risk and return. For retirement plan fiduciaries, that puts incorporating ESG factors into investment decisions, squarely into play. But there are boundaries that they must adhere to in order to stay out of the hot seat of ERISA litigation. So how should a retirement plan fiduciary proceed when it comes to including ESG options in a plan? Stick to your knitting and ensure that investments incorporate ESG factors with the goal of increasing returns and reducing risk.

In order to do this, plan fiduciaries need to understand how an investment manager assesses ESG related risks and how they determine what impact, if any, these risks have on an investment’s enterprise value going forward. What are the factors they are using in scoring investments and how do they integrate those scores into the process? For example, when looking at two similar companies in the energy sector, if Company A relies solely on fossil fuels in its business, and Company B has started to phase in green and renewable sources of energy, Company A will likely have the higher ESG risk. That higher risk can affect the value of the company and that valuation analysis can inform a risk/return assessment. What the investment manager shouldn’t be doing, is eliminating Company A because they aren’t adhering to a preconceived notion of what a portfolio should and should not hold.

As ESG considerations are becoming more and more commonplace in markets today, assessing and understanding how various factors can add or detract from an investment’s overall growth potential, should always be the objective of a retirement plan. Notwithstanding the proposed statutory language, fiduciaries cannot forget that first and foremost, they remain subject to traditional fiduciary duties at all times. The legislation may provide a safe harbor for implementing ESG factors, but it doesn’t otherwise take fiduciaries off the fiduciary hook. And that is a good thing. 

INSIGHTS

Stay up-to-date with the latest news and resources.

Plan Sponsors Must Focus on Cybersecurity - How Broad Are Their Fiduciary Shoulders?

Cryptocurrencies: Not Yet Ready for Primetime

ESG Doesn't Trump Fiduciary Principles

GET IN TOUCH

Let’s talk about the best options for you and your plan participants.