Source: https://iainsight.wordpress.com/2018/08/28/fundamental-unfairness-erisa-section-404c-is-not-working/
Timestamp: 2019-04-19 19:02:39+00:00

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the need to provide plan participants with material and meaningful information to allow them to make “fully informed decisions” as described in Section 404(c).
While Reish’s testimony was made in 2006, the sad fact is that the same problems exist today. Even worse is the fact that in too many instances the courts seemingly fail to acknowledge that such problems persist, that 404(c) still does not work for plan participants, their beneficiaries or plan fiduciaries. Why?
Prior to the creation of defined-contribution plans, defined-benefit plans were the primary pension plans. But employers did not like defined-benefit plans because the employer bore the investment risk in such plans. Pension payments had to be made, regardless of the investment performance of the plan’s portfolio.
Plans and the plan advisers have eagerly pointed to recent cases in which the court dismissed the plaintiff’s excessive fees and/or breach of fiduciary duty claims. Having reviewed said dismissals, I would strongly suggest that plans and plan advisers temper such celebrations, as I believe that there are valid grounds for reversing most, if not all, of such decisions..
For instance, in the recent dismissal of the NYU 403(b) action, the court decision seemed to rely heavily on the fact that the court applied the prudence standards for defined-benefit plans, even though the court openly acknowledged that the NYU plans were defined-contribution plans. There is a significant difference between the two, resulting in serious questions about the court’s entire thought process behind the court’s decision.
Since employers bore the risk in defined-benefit plans, they were given more flexibility in choosing investments for their pension plans. The prudence of investments in a defined-benefit plan is evaluated in terms of the portfolio as a whole. However, since plan participants bear the investment risk in defined-contribution plans, the prudence of the investments in a defined-contribution plan is evaluated in terms of the each individual option in the plan.
Building on the importance of the provision of “sufficient information,” at least two courts have suggested that if participants are not provided with the material information necessary to protect their interests, then the participants cannot be said to have exercised the control over their 404(c) account.7.
So what constitutes “sufficient information to make an informed decision?” Two consistent themes of ERISA are cost-control and risk management. In Part I, we discussed the cost control issue and noted that the Restatement (Third) of Trusts (Restatement) states that actively managed mutual funds should not be recommended or used in trusts and plans unless they are cost-efficient.
With regard to risk management, various academic studies and the Restatement emphasize the value of effective diversification within a portfolio. The DOL and the courts have adopted Modern Portfolio Theory (MPT) as the accepted model for portfolio diversification/risk management.
A number of courts have overlooked the significance of correlation of returns by suggesting that the sheer number of investment options within a retirement plan satisfies ERISA’s diversification requirement. Many of these courts reference the court’s decision in Hecker v. Deere & Co.,10 which suggested the “sheer number of options” theory.
There are those in the legal community, myself included, that the Hecker court’s self-described “clarification” was actually a reversal of their earlier “sheer number of investment options” position.13 And yet attorneys for the investment industry and a number of courts still try to assert the “sheer number” theory against plan participants.
Furthermore, section 404(c) places upon a plan sponsor the affirmative duty to provide the required sufficient information to plan participants and their beneficiaries.
It can, and should, be argued that correlation of return data is analogous to the historic return and risk data allowed under the DOL’s release, as such data does not advise plan participants as to which investments to choose. Correlation of returns data simply gives investors material information on which investments not to choose in order to minimize their investment risk. Again, this would seem to be totally consistent with both ERISA’s promise of “sufficient information” to allow “meaningful control” over the assets in their account, as well as ERISA’s stated purpose to help protect pension plan participants and their beneficiaries.
The importance of a proper investigation of a plan’s investment options by an ERISA fiduciary cannot be overstated.
Section 404(c) provides that a plan fiduciary shall not be responsible for the losses suffered by a plan participant to the extent that such losses are due to the control of the account by the plan participant.22 While a full review of all of the requirements required to qualify as a Section 404(c) plan is beyond the scope of this white paper, I want to focus on an area that is often overlooked and, consequently, ripe for litigation.
I would argue that that is exactly why ERISA included the “sufficient information to make an informed decision” requirement. I would also argue that based on the unquestionable importance of correlation of returns in portfolio risk management, the failure to provide plan participants with such information effectively denies them control over their 404(c) accounts and, thus, is grounds for denial of protection under 404(c)’s safe harbor provisions.
There are various factors that are used in determining whether a plan participant exercised the requisite control over his account. The first question that must be addressed is whether the plan provided participants with the required broad range of investments.25 In order to satisfy the “broad range of investments” requirement, the plan must provide investment alternatives “with materially different risk and return characteristics” that allow participants to effectively diversify their investment account so as to reduce the risk of large losses, i.e., utilize MPT.26 Plan sponsors cannot be sure that they have met this requirement unless they factor in the correlation of returns between the investments chosen for their plan.
It can be anticipated that ERISA fiduciaries might object to the suggested disclosure requirement, claiming that plan service providers do not provide such information to the plan. Such objections are without merit.
As have outlined herein, I believe that most plan sponsors fail to comply with section 404(c)’s “sufficient information” and “control” requirements. I believe that plan sponsors must have that information in order to (1) comply with their fiduciary duty to conduct an independent investigation and evaluation of a plan’s investment options, and (2) to ensure that the plan options provide plan participant with the opportunity to effectively diversify their retirement account and minimize the risk of large losses.
1. “Written Comments for Testimony of C. Frederick Reish,” (Reish testimony) https://benefitslink.com/articles/guests/reish_20070920.pdf.
4. 29 C.F.R. §§ 2550.404c-1(b)(1)(i), (ii).
5. 29 C.F.R. § 2550.404c-1(b)(2)(i)(B).
6. Preamble to 404(c) Final Regulations, 57 Fed. Reg. 46906, 46909-46910.
7. In re Regions Morgan Keegan ERISA Litigation, 692 F.Supp.2d 944, 957 (W.D. Tenn. 2010); In re Sprint Corp. ERISA Litigation, 388 F. Supp. 2d 1207 (D. Kansas 2004).
8. Harry Markowitz, “Portfolio Selection: Efficient Diversification of Investments”, 2d ed., (Malden, MA: Basil Blackwell Publishers, Inc., 1991), 5.
9. Restatement Third, Trusts, § 90 (Prudent Investor Rule), cmt f. Copyright © 2007 by The American Law Institute. Reprinted with permission. All rights reserved.
10. Hecker v. Deere & Co., 556 F.3d 575 (2009).
11. Hecker v. Deere & Co., (Hecker II) 569 F.3d 708, 711 (2009).
12. Hecker II, 711 (2009).
13. Fred Reish, “Hecker v. Deere Revisited,” https://www.drinkerbiddle.com/insights/ publications/2009/09/hecker-vs-deere-revisited.
14. Johnston v. CIGNA Corp., 916 P.2d 643, (1996).
15. Department of Labor Interpretive Bulletin 96-1.
16. Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90 103 S.Ct 2890.
17. Fink v. National Sav. and Trust, 772 F.2d 951, 957 (D.C. Cir. 1985).
18. Howard v. Shay, 100 F.3d 1484, 1488 (4th Cir. 1996).
19. Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983).
21. In re Regions Morgan Keegan ERISA Litigation, 692 F.Supp.2d 944, 957 (W.D. Tenn. 2010).
22. 29 C.F.R. § 2550.404c-1(a)(1).
23. Hecker II, supra, 711.
24. Enron, at 578-79; In re AEP ERISA Litigation, 327 F.Supp.2d 812, 829 (S.D. Ohio 2004).
25. In re Unisys Sav. Plan Litigation, 74 F.3d 420, 442 (1996).
26. Unisys, at 447; 29 C.F.R. § 2550.404c-1(b)(3)(i)(A), (B)(2), (B)(4) and (C).
27. AEP, 829; Enron, at 576, 578-79.
28. 29 C.F.R. § 2550.404c-1(b)(2).
29. Unisys, at 447; 29 C.F.R. § 2550.404c-1(b)(3)(i)(B)(2).
30. 29 C.F.R. § 2550.404a-1(b)(1)(ii).
31. 29 C.F.R. § 2550.404a-1(b)(2)(ii)(A).
35. Donovan v. Bierwirth, 680 F.2d 263, 272-73.
This entry was posted in 404c, 404c compliance, compliance, ERISA, ERISA litigation, fiduciary compliance, fiduciary law, Fiduciary prudence, pension plans, retirement plans and tagged 404c, 404c compliance, compliance, ERISA, fiduciary law, pension plans, retirement plans. Bookmark the permalink.

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