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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