Fiduciary Misperceptions

Selecting, Evaluating, and Monitoring Investments in DC Plans: A Legal Perspective from Goodwin LLP

Executive Summary

Plan sponsors today have unprecedented options available to them when making investment selection decisions for their plans. At the same time, plan sponsors face increasingly complex fiduciary requirements, as well as pressure to provide an optimal plan experience for participants at a reasonable cost. Making investment selection decisions under these conditions can prove challenging.

These challenges are compounded by the fact that defined contribution plans are increasingly the target of class action litigation. Claims are often brought by current or former employee-participants who have been recruited by plaintiff law firms to assert claims on behalf of the plan. Alleged claims are often based on little more than publicly available information about a plan’s investments, and lack the benefit of any insight into the fiduciaries’ selection and oversight process. Nonetheless, the specter of a lawsuit has many fiduciaries reevaluating how they select and monitor their plan investments.

After more than a decade of litigation, a body of decisional law is emerging that can offer plan fiduciaries insights into how courts analyze claims concerning plan investments. This white paper aims to help fiduciaries navigate the waters of plan investment evaluation, selection, and monitoring processes by:

  • Decoding the legal standards in recent court decisions that apply to fiduciaries who are responsible for choosing investment options for their plans.
  • Identifying some key takeaways from legal authorities that may assist fiduciaries assessing investments for their plan lineup.
  • Emphasizing the importance of process as the most important factor in fiduciary decision-making.

Executive Summary

Plan sponsors today have unprecedented options available to them when making investment selection decisions for their plans. At the same time, plan sponsors face increasingly complex fiduciary requirements, as well as pressure to provide an optimal plan experience for participants at a reasonable cost. Making investment selection decisions under these conditions can prove challenging.

These challenges are compounded by the fact that defined contribution plans are increasingly the target of class action litigation. Claims are often brought by current or former employee-participants who have been recruited by plaintiff law firms to assert claims on behalf of the plan. Alleged claims are often based on little more than publicly available information about a plan’s investments, and lack the benefit of any insight into the fiduciaries’ selection and oversight process. Nonetheless, the specter of a lawsuit has many fiduciaries reevaluating how they select and monitor their plan investments.

After more than a decade of litigation, a body of decisional law is emerging that can offer plan fiduciaries insights into how courts analyze claims concerning plan investments. This white paper aims to help fiduciaries navigate the waters of plan investment evaluation, selection, and monitoring processes by:

  • Decoding the legal standards in recent court decisions that apply to fiduciaries who are responsible for choosing investment options for their plans.
  • Identifying some key takeaways from legal authorities that may assist fiduciaries assessing investments for their plan lineup.
  • Emphasizing the importance of process as the most important factor in fiduciary decision-making.

Decoding ERISA’s Fiduciary Standards

ERISA holds plan fiduciaries to certain standards of care that the courts regard as the highest standards known to law. Namely:

  • Fiduciaries owe a duty of loyalty1 to plan participants and beneficiaries. This means that the fiduciaries must act solely in the interests of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and paying only reasonable plan expenses. This standard is often referred to as the “exclusive benefit rule.” Fiduciary decisions must be made with an eye single to the interests of participants. Of course, when it comes to investment selection, ensuring that the plan pays only reasonable expenses can also take into account the total costs of participation to participants—inclusive of investments and plan administration, whether paid for separately or through revenue generated by plan investments.
  • Fiduciaries owe a duty of care2 to plan participants and beneficiaries. This means that when the fiduciaries act for the plan, they must act “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 a like character and with like aims.” This standard is known as the “prudent person rule.”
  • Fiduciaries also must act consistent with the documentsthat govern the plan and must diversifythe plan’s investments so as to minimize the risk of investment losses.

When it comes to a plan’s investments, most defined contribution plans are set up so that the participants themselves can decide how to invest their plan accounts. Plans typically make available a range of options from which a participant can construct a diversified portfolio. These options can include a qualified default investment alternative into which a participant’s account will be invested in the absence of participant direction.

Notwithstanding the role of participant-directed investing, plan fiduciaries do have the responsibility to select and to monitor the designated investment alternatives that will be made available to participants. Meeting these responsibilities requires an informed and thorough evaluation of both the needs of their plan and a clear understanding of the range of options available in the marketplace. Here, the focus is on the inputs to the fiduciary’s decision-making, and not on the investment outcomes achieved. In other words, employing a good investment selection process is a key to meeting fiduciary obligations, while also acting with exclusively participants’ interests in mind.

A good fiduciary investment selection process may include:

  • Understanding the documents that govern the plan, which may set forth investment objectives or mandates for the plan. Remember, following the plan documents is a key fiduciary obligation.
  • Meeting regularly to discuss and review the plan’s investment options. Again, the focus here is on process. It is important to have a decision-making process that is thorough, consistently applied, and documented.
  • Considering key attributes of the investment options (such as performance, expenses, and the spectrum of risks and corresponding trade-offs) when considering available options and monitoring those investments chosen for the plan.
  • Accounting for the interests of participants in their retirement income.

Read the Full Article

In the complex and litigation-prone world defined contribution plans occupy, it is important to underline what the real focal points for fiduciaries should be.

ERISA § 404(a)(1)(A), 29 U.S.C. § 1104(a)(1)(A).

ERISA § 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B).

ERISA § 404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D).

ERISA § 404(a)(1)(C), 29 U.S.C. § 1104(a)(1)(C).

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This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter or its lawyers. Prior results do not guarantee a similar outcome. Goodwin Procter is an international legal practice carried on by Goodwin Procter LLP and its affiliated entities. For further information about our offices and the regulatory regimes that apply to them, please refer to our Legal Notices. © 2021 Goodwin Procter. All rights reserved. Goodwin Procter LLP, 100 Northern Avenue, Boston, MA 02210. Visit goodwinlaw.com for more information.

This paper is sponsored by T. Rowe Price Associates, Inc. Contents of this paper are for informational purposes only and not for the purpose of providing legal advice. The analysis and conclusions are solely those of the author.

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