Plan sponsors have a central role in the delivery of retirement benefits to America's workforce. Their decisions enable plan participants to retire with the dignity they have earned, and their work requires a level of focus, diligence and commitment that merits respect.
Recently, plan sponsors have come under increased legal scrutiny as the threat of litigation — often involving investment menus and related fees — has become more prevalent across the industry. Naturally this trend has the attention of plan sponsors. Some have concluded that the safest path to avoid litigation is to eschew active management options and seek the lowest-cost provider, under the false presumption that this approach lowers fiduciary risk.
Such a response, while understandable, is not consistent with a plan fiduciary's obligations under the Employee Retirement Income Security Act of 1974 and related interpretations issued by the U.S. Department of Labor and recent court cases.
ERISA calls for plan sponsors to take a wide variety of factors into account when making fiduciary decisions, not fees alone, with an eye toward a sound decision-making process and prudence. In a recently released paper commissioned by T. Rowe Price, “The Misperceptions of Fiduciary Risk and Active Management in DC Plans: A Legal Perspective,” Alison Douglass, partner with the law firm Goodwin LLP, asserts five key guiding principles that can aid fiduciaries in selecting and monitoring investment options within their plan lineup.
It's about the process. In order to satisfy ERISA prudence standards, a fiduciary needs to make informed decisions. This means fiduciaries should have a good decision-making process.
Focus on the value-for-cost proposition. Plan fiduciaries are not required to scour the market for the cheapest possible investment options. Rather, fiduciaries should focus on the value-for-cost proposition. This means fiduciaries have latitude to consider what different investment strategies provide to plan participants, and not just cost. For actively managed investments, value can be determined by the investment manager's ability to deliver on the objective to produce returns that are superior to a benchmark, even after costs are taken into account.
One size does not fit all. Making good decisions about investment menus requires fiduciaries to understand the available alternatives and to know their audience.
Range of choice and strategies can be appropriate. In choosing investment strategies, plan fiduciaries should consider the particular attributes of their plans, and may appropriately offer plan participants an array of choices across multiple investment styles and strategies.
Fear-based decisions fall short of prudence. While litigation might be top of mind, it has no place in fiduciary decision-making. Instead, a well-rounded assessment of investment strategies and options that focuses on participant outcomes and plan objectives should supersede all other factors.
Fiduciary standards do not mandate any particular investment lineup, and do not favor the use of either actively or passively managed strategies. These principles provide a sound framework that plan sponsors can use to evaluate plan investment options and design plan investment platforms.
While no strategy can eliminate the possibility of litigation, courts have recognized the role that different management strategies can play in a plan lineup that provides participants with a broad range of choice, both active and passive. The most appropriate fiduciary course a plan sponsor can take is to have a sound, diligent and documented process that supports all decision-making.
It is important for plan sponsors to have clarity of their overall plan goals. They need to set corresponding objectives, develop a well-documented process that guides their decisions, document their decision making, and monitor their choices for ongoing fit.
Designing investment structures with these principles in mind can help sponsors get back to the basics of arranging investment structures focused on participant outcomes that align to what sponsors believe is best for their plan.
Michael Davis is head of U.S. institutional defined contribution plan specialists and Lorie Latham is a senior defined contribution strategist for T. Rowe Price's global investment services division, Baltimore. This content represents the views of the authors. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.
