Pension plans can consider the risks of liability obligations when designing an investment strategy — even if the sponsor reaps an incidental benefit, the Labor Department has advised.
Although some plans have implemented liability-driven investment strategies, some industry attorneys said there has been lingering concern that the strategies — which can have the effect of dampening volatility of the sponsor's contribution obligations and company financial statements — could be perceived as a violation of ERISA requirements to plan fiduciaries to act in the best interests of participants and beneficiaries.
In an advisory letter to JPMorgan Chase Bank, the Labor Department said plan fiduciaries have broad discretion to define investment strategies for their plans. "A fiduciary would not, in the view of the department, violate their duties under (ERISA) solely because the fiduciary implements an investment strategy for a plan that takes into account the liability obligations of the plan and the risks associated with such liabilities and results in reduced volatility in the plan's funding requirements," the department's letter said.
Donald Myers, an ERISA attorney for Reed Smith LLP, Washington, who is representing JPMorgan Chase, said the advisory opinion would give "greater comfort" to plan fiduciaries who want to seek a better match between a plan's liabilities and its assets.
A. Richard "Brick" Susko, an ERISA attorney with Cleary Gottlieb Steen & Hamilton, New York, said fiduciaries who rely on the new opinion to hedge plan liabilities should proceed cautiously. "A fiduciary can do liability hedging if the fiduciary determines that it is in the best interest of the plan and the benefit to the employer is incidental," Mr. Susko said. "On the other hand, as with any other investment strategy, it would be problematic if the plan undertakes the strategy solely because the CFO determines that it is in the best interests of the employer."