Bitcoin – Irrational Exuberance 2.0

By Mitchell Shames

The other day I received a survey in my inbox to the effect of: “should institutional investors start thinking about Bitcoin?”

The question is so preposterous in my mind that I both deleted the survey and couldn’t help but wonder if markets have crossed the threshold into another era of Irrational Exuberance – Alan Greenspan’s characterization of the dot.com boom… and, bust.  

Every day there are articles and postings about potential new “investments” – Bitcoin, NFT’s, and SPAC’s. Each is touted as either the next great investment opportunity OR the next tulip mania. To be fair, at this point, we simply don’t know. New technologies are always enticing and alluring. But for retirement plan fiduciaries, the unknowns should always temper unbridled enthusiasm.

Fiduciaries hold discretion, with respect to investment decisions, over other people’s retirement assets. Vast numbers of employees are relying on these assets to fund their retirement. Given the magnitude and the implications of this responsibility, fiduciaries are charged with acting prudently. Each investment decision is judged against this standard of prudence.

Over the past decades (it’s almost 50 years since ERISA was enacted) norms of investment decision-making have developed around the investment of plan assets. Whether assessing a manager or a strategy, analysis of past performance is a central principle in making investment decisions. Legions of consultants stand ready to assist plan fiduciaries in determining whether a manager or strategy fits within an asset allocation plan or within investment guidelines. Most of these analytics include a detailed review of investment performance.

When it comes to most of these new investment opportunities, however, there simply is no performance history. There should be no need for a survey. Right out of the box, these assets should not be eligible for ERISA qualified plans. But, yet, they are quite enticing.

The pandemic has stretched on long enough. Corporate earnings took a significant hit in 2020.  As we begin to come out of the global quarantine there are glimmers of revived economic output. The pent-up demand is staggering; so is the urge to make up for the lost time and the lost earnings. Bitcoin, NFT’s and SPAC’s play into the zeitgeist of the moment.

Retirement plan fiduciaries must stick to tried and true, prudent methodologies. Certainly, they must assess the performance of the plan investments through the pandemic. But, while annual performance is important, performance also must be viewed over longer periods; three, five, and ten years. If a review indicates that changes to a portfolio might be warranted, they must start with the investment guidelines for the plan and the assumptions underlying the guidelines. By necessity, this needs to be a deliberative, careful, and yes, a prudent process.

Bitcoin, NFT’s, and SPAC’s are the glittery new objects in the investment universe. The allure of outsized investment returns is powerful. Fiduciaries, however, should know better. They must exercise prudence before committing retirement funds to these assets.

Yes, I am skeptical. However, I also know that as a fiduciary, I must keep my eye on these new investments, as well as others that come onto the horizon. While they might not be prudent today, who knows what the next five or ten years may bring.

But, today, surveys regarding Bitcoin are premature.

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

Corporate America loves to manage its retirements plans. The motivation for this is unclear as the upside is limited, and the downside keeps increasing. With creative litigation exploding and expanding the burden, now, plan sponsors can add cybersecurity to the laundry list of competencies that are required of plan fiduciaries. 

In the old days, retirement committee members were covered if they understood the basic asset allocations of their pension plans and the selection of its asset managers. In retrospect, the fiduciary life was much simpler then. With the introduction of 401(k) plans, skill sets had to expand to include selection of investment options and a host of service providers, including recordkeepers and administrators. Importantly, as a result of a decade’s worth of “fee litigation”, these fiduciaries now need to understand the intricate pricing techniques of the mutual fund industry. This includes multiple share classes, revenue sharing, and expense benchmarking.

Recently, there has been an uptick in ERISA litigation focusing on cybersecurity. The risks here are high, as plan participants aren’t just accessing their accounts electronically to monitor their progress and make investment selections, they are also making withdrawals. Furthermore, the recent CARES act allows certain plan participants to take in-service distributions and loans. Practically speaking, courtesy of the pandemic, electronic activity within Plans has increased significantly. Already cyber-thieves have managed to create false accounts, false passwords and have been able to initiate fraudulent withdrawals from retirement plans.

Like it or not, plan fiduciaries have now been thrown into the wild world cybersecurity. In order to stay a step ahead of cyber criminals, protect participant assets and stay out of the crosshairs of the plaintiffs’ lawyers, best practices must evolve quickly to include cybersecurity issues.  

ERISA lawyers and consultants are now compiling detailed diligence monitoring lists to assure that recordkeepers and administrators have adopted state of the art cybersecurity capabilities and safeguards. And recently, the U.S. Department of Labor has issued new cybersecurity guidance for plan sponsors. If mastering mutual fund fee structures wasn’t enough of a burden, now plan fiduciaries must dig into the nitty gritty of electronic account access, password policies, and control testing. And, while they are at it, insurance and fidelity bond coverage must now be reviewed to explore coverage in the event of a cybersecurity loss.

Remember, it is not good enough for plan fiduciaries to have a “passing” knowledge of these issues, nor even reasonable knowledge. Instead, plan fiduciaries and investment committee members must be “prudent experts. Imagine being the head of Human Resources, the General Counsel, or a senior treasury official, and having to add cybersecurity expertise to the already long list of fiduciary responsibilities? No doubt in the time of COVID-19 their plates are already full with their day jobs. How broad are their shoulders?

As the world continues to evolve and as the risks and responsibilities of running a retirement plan continue to increase, plan sponsors should be thinking differently. Delegating fiduciary oversight to an independent fiduciary can relieve investment committees from these responsibilities. Let the independent fiduciary be an expert on the various fee structures crafted by the mutual fund industry. Let an independent fiduciary implement, monitor and be responsible for cybersecurity policies and procedures. Doing so would allow company executives and investment committee members to focus on their own bottom lines. And it would allow them to focus on generating earnings rather than on the business of running and maintaining a retirement plan.

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The Hidden Dangers of Target Date Funds

ERISA experts warn that Target Date Funds are ticking time bombs of potential losses and liabilities. In fact, they expect the funds to be the next big thing in ERISA litigation, possibly eclipsing fee and expense litigation.  

TDFs have grown 1,200% over the past decade and are now estimated to hold $2.8 trillion of American’s retirement assets. They are effectively packaged as simple alternatives to standard 401(k) investment options. One fund, one investment, one transaction to glide plan participants to a secure retirement; an attractive turnkey decision that any retirement committee might make. 

For the retirement industry however, these funds are the Holy Grail of 401(k) offerings.   Regulations allow plan sponsors to set Target Date Funds as default investment options for a plan. Employee’s then pour their assets into “set it and forget it” products, paying more in fees then the old stable value alternatives. Research shows that most plan participants don’t change these investments very often. So in industry parlance, these are “sticky assets” and they can generate a decades long revenue stream for the fund companies. Everyone seems to be happy, plan sponsors, fund companies, and plan participants. 

However, while glossy marketing materials present an illusion of simplicity, Target Date Funds consist of an extraordinarily complicated infrastructure of financial and operational tasks and functions. A Target Date Fund portfolio requires sophisticated investment assumptions and determinations about markets, interest rates, portfolio construction, asset allocations, and more. Much of it happens beyond the vision and understanding of most fiduciary retirement committees.   

This matters now more than ever because the fine print of Target Date Funds shifts ultimate fiduciary liability to the plan fiduciaries (often senior management of the plan sponsor), and that liability is potentially personal to these fiduciaries. Soliciting advice from consultants and advisors likely does little to mitigate this ultimate potential liability.

For plan sponsors, the best defense is a good offense. Get underneath the investment jargon to understand the rationale for the investment strategy and the execution of the strategy. The list of factors that need to be reviewed for each component fund within the strategy is extensive and includes: investment performance and risk analytics; expenses; plan demographics; and the investment management teams directing the investment portfolios. Examining the fiduciary processes of each component fund is also equally critical. The details can make all the difference. 

Most importantly, fiduciaries must understand, and sign off on, the Target Date Fund’s “glide path” – a formula that over time, shifts the asset allocation of the portfolio consistent with the projected termination date of the Target Date Fund.  

Glide paths are unique to Target Date Funds and have never been deployed on a mass scale before. In theory, the formula works, but track records are limited and are based upon assumptions that may or may not apply to a particular plan. For instance, does the glide path match the demographics of the plan? In addition, Target Date Funds often delegate broad discretion to the fund managers. But what happens if a fund shifts an allocation into an alternative asset class, such as private equity? Do the plan fiduciaries understand (and approve) this shift in allocation? 

Bottom line, retirement plan fiduciaries need to be attuned to the potential trouble spots – both those that are obvious today, and those that may be lurking down the road. Remember, the lifetime of a Target Date Fund can span anywhere from 20 years to even 50 years and beyond. Investing in one is a marathon, not a sprint. 

Target Date Funds are a prime example of the rising complexity and cost of retirement plan options. Plan participants are investing their nest eggs with a single provider, for decades. Ultimately, plan sponsors are on the hook for potential liabilities based on intricate details that their retirement committees may not be equipped to evaluate. The most prudent course is to delegate these decisions to qualified experts who are willing accept the fiduciary responsibility of managing them. 

As fiduciaries, we know there are no single decisions when constructing a retirement plan investment strategy. Essentially, we approach Target Date Funds the way GM constructs and assembles a Cadillac. Because the company incorporates hundreds of components from different manufacturers, specialists check the quality of every component, and another team assembles them into the cars you see on the road. It’s GM’s responsibility to apply expertise to every facet of its product and to assume liability for the vehicle’s performance. That’s important – after all, you’re not just buying a car that looks nice in your driveway, you need to have confidence in the safety and integrity of your car as you and your family hit the open road. 

Saving for retirement is similar – you need to be confident that the investment vehicle you have selected will deliver you safely to your destination.

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Is It Time for Plan Sponsors to Rethink Retirement Plan Management?

The retirement plan system is broken – just ask corporate directors and C-suite executives who are responsible for these plans.

A barrage of increasing risks, known and unknown, demand and divert the attention of senior management:

• • Mounting plan liabilities

• • Sophisticated and complex investment strategies

• • Class action litigation

All of these risks divert senior management’s time from executing the company’s corporate mission. Too many CEO’s offer the same complaint, “The retirement plan is one of my biggest headaches.”

ERISA does not mandate that a plan sponsor or its senior managers act as fiduciaries of a plan or assume the ancillary potential liability that is associated with fiduciary responsibility. Still, most corporations rely on internal committees to manage plan responsibilities. Typically, these committees are staffed with senior executives who have well-honed experience in areas such as finance, legal and human resources but often, they are not investment professionals. And yet, ERISA imposes personal liability on these corporate fiduciaries.

Therein lies the challenge – does this structure best serve the interests of the plan participants or the plan sponsor?

For some plan sponsors the answer will be yes. But for an increasing number, the realities of handling retirement plan management internally just don’t make good sense. As the world and the economy are rapidly changing, it may be good time to consider another option.

Today’s economic environment requires corporations to focus all available resources on executing core business strategies. Allocating the fiduciary responsibilities and maintenance of employee retirement plans to an expert independent fiduciary can eliminate a significant distraction.

For many retirement plans this is a departure from the old ways of doing things. But this new business model will enable plan sponsors to transfer the burden of fiduciary responsibility and the risk associated with it.

Hiring an independent fiduciary can not only significantly mitigate the personal liability of corporate officers but will likely generate material savings on the administrative costs of managing an ERISA qualified retirement plan. As expert professionals in fiduciary practices and investment management, the actions of Harrison Fiduciary Group and the decisions that we make, are always in the best interest of plan participants, ensure that there are no conflicts of interests and are consistent with all other ERISA fiduciary standards. Any independent fiduciary that a plan considers, should also make this pledge.

Hiring an independent fiduciary firm can assure corporate directors and senior managers that their valued employees and retirees receive the very best expert investment oversight and decision making with respect to their retirement savings. And importantly, it will free them from the aforementioned responsibilities, including the associated liabilities, so they can concentrate exclusively on their core business challenges.

Maybe it’s time.

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INSIGHT: Calling ERISA
Ghostbusters—The Rise of Independent Fiduciaries

Settlement of ERISA lawsuits are increasingly including the hiring of an independent fiduciary to oversee plan processes. With a nod to the movie Ghostbusters, two fiduciary experts examine the reasons for the trend, the role of an independent fiduciary, and how ERISA investment committee activity likely changes when they’re required.

If recent settlement trends are any indication, ERISA-savvy independent fiduciaries will be working around the clock.

Just like the heroes in Ghostbusters, the 1984 blockbuster movie, neutral arbiters will continue wrestling with the ghouls of sub-par practices to attempt to save the day for retirement plan participants. Whether they succeed depends on a panoply of factors, not the least of which is the authority granted to them to ensure that a robust process exists, is implemented, and when needed, revised to reflect prudence and prevailing facts and circumstances.

The Employee Retirement Income Security Act of 1974 (ERISA) and the Department of Labor each consistently rely upon independent fiduciaries to protect the economic interests of plan participants. Transactions involving company securities or the purchase of annuity contracts raise potential risks of self-dealing but can be facilitated through the use of an independent fiduciary.

Furthermore, the DOL requires the use of an independent fiduciary any time a plan sponsor or financial institution requests individual exemptive relief from the self-dealing prohibited transactions rules. Whether by statute, regulation, or administrative relief, the ERISA environment is no stranger to the protections associated with engaging independent fiduciaries.

What’s different now is a movement by the plaintiff’s bar to set in place operational changes with respect to plan management. Increasingly, reforms sought by attorneys are in addition to any pre-trial or intra-trial financial settlement or, when a court opines against defendants, economic damages.

Demands typically reflect plan design, amount of monetary harm (alleged or adjudicated), nature of fiduciary breach complaints, negotiating leverage of each side, relevant regulatory opinions, and case precedents. Mandates range from simple to complex. Some are relatively inexpensive to implement. Others require a large budget.

Not all directives are universally agreed upon as the singular way to add value for participants. Consider vendor selection. Defined contribution plan stewards and their advisers still wax about the cost-benefit tradeoffs of issuing a request for proposal (RFP) versus relying on consultant bench-marking. Defined benefit plan decision-makers continue to debate the merits of liability-driven investing or restructuring with the help of an insurance company. An automatic, one-size-fits-all approach is no substitute for procedural prudence.

ERISA Bill Murrays and Sigourney Weavers

Enter the independent fiduciaries, the ERISA Bill Murrays and Sigourney Weavers, to navigate how best assets are handled “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

They stand atop the governance infrastructure of a qualified plan, waging war against conflicts and bad practices. The engagement of an independent fiduciary signals change. Her presence can enhance the critical rebuilding of trust among plan participants that often disintegrates during class action litigation. In a tight labor market, companies rely on a generous benefit mix to attract and retain talent. Enlightened sponsors, including those who settle without admitting fault, want employees to value their retirement plans.

The hiring of an independent fiduciary occurs after all parties agree on the need to engage one. The recruitment process includes steps such as identifying which individuals and firms should be considered, the basis on which they will be evaluated for the job, how much to pay them, and for how long. Equally important, a binding agreement must be finalized.

Contract terms will vary by situation. What should not vary is protection allowing the independent fiduciary to rigorously watch over the actions of in-house ERISA investment committee members and outside vendors with impunity. No one is well-served if a supposedly objective third party rubber stamps decisions or has limited clout to prevent undue risk-taking by others.

As the term implies, two separate determinations must be assessed when considering a firm (or individual) for this position. The firm must be both “independent” and a “fiduciary.” Independence requires the firm have no other relationships with the plan sponsor or the retirement plan which could give rise to a conflict of interest.

As a fiduciary, the firm should demonstrate its expertise in fiduciary matters. Due to the multi-disciplinary nature of ERISA decision-making, an independent fiduciary will often be supported by persons with experience, knowledge and credentials in governance, investment management, operations, and technology.

Significant case law over the past decades has given rise to a robust set of standards related to the fiduciary management of retirement plans. Professional fiduciaries are not only learned about these practices, they place fiduciary practices at the center of their business model.

Integrating the Independent Fiduciary

Integrating an independent fiduciary, once hired, can be challenging, especially if there are some who resist the role. Additionally, the independent fiduciary will need to quickly learn about the pre-existing structure of plan administrators and service providers.

An essential early step is the independent fiduciary’s assessment of the current procedures which govern a specific plan. Court decisions are clear and unambiguous that procedural prudence is a key element in fulfilling fiduciary responsibility. Beyond that, an independent fiduciary should review documentation as well a sponsor’s support staff abilities. An independent fiduciary needs assurance that sponsor resources are available so she can eliminate process elements that don’t work and make requisite improvements.

Procedural prudence requires a precise allocation of settlor and fiduciary responsibilities among the various professionals engaged in the management of a specified retirement plan. ERISA affords significant flexibility in delegating certain duties as long as properly vetted service providers are regularly and thoroughly monitored.

An independent fiduciary should have the latitude to renegotiate vendor contracts. This activity would, inter alia, reflect the independent fiduciary’s appraisal of the reasonableness of fees paid to outsiders, taking the value of services rendered into account.

Abiding by fiduciary best practices likewise requires the maintenance of contemporaneous written records. Such documents would embody procedures relied on by plan fiduciaries as well as tracking how, why, and when plan fiduciaries make decisions.

The independent fiduciary must brutally assess any deficiencies regarding how in-house ERISA fiduciary decisions were made in the past and then correct them. This scrutiny could result in major changes such as revising the investment policy statement for the plan, working with outside ERISA counsel and in-house Human Resources to improve participant communications, and/or hiring a firm to carry out a governance audit.

Once the initial assessment occurs, the independent fiduciary will regularly monitor the ERISA fiduciary decision-making process. At least annually, and potentially more often, an assessment must be made by the independent fiduciary as to whether the procedural prudence apparatus is

being effectively utilized, as well as determining whether new facts or contexts should force adjustments of the process, no matter how longstanding.

Providing fiduciary responsibility is a dynamic process. The work of an ERISA fiduciary is never done nor should it be. Once an independent fiduciary’s contract has expired, in-house fiduciaries must continue the process of self-examination, alone or with the reinforcement of relevant third party experts.

With aggregate ERISA litigation settlements and court decisions totaling billions of dollars, independent fiduciaries can play a vital role in helping sponsors stay below the radar of plaintiff’s counsel. If a lawsuit has already been filed, an independent fiduciary can assist with mediation, pre trial settlement, or post-resolution upgrades. Even without proton packs and green slime detectors, effective independent fiduciaries are modern day action heroes.

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