Perceiving and Managing Fiduciary Risk

By John Iekel • September 21, 2017 • 0 Comments
The teeth, if not the ultimate fate, of the fiduciary rule may be a matter of debate, but even if they are uncertain, the rule has contributed to a sharper focus on the way fiduciary duties are discharged. That attention, and a heightened awareness of how one is performing such functions, will not be going away anytime soon. Accordingly, a recent paper discusses fiduciary risk and management.

In “The Misperception of Fiduciary Risk and Active Management in DC Plans: A Legal Perspective,” Alison Douglass, a partner for ERISA litigation at Goodwin LLP, discusses ERISA fiduciary standards and offers some guiding principles for fiduciary investment selection and use of active management.

These principles apply even though in most defined contribution plans, participants can decide how their funds will be invested. Despite that, says Douglass, plan fiduciaries still are responsible for selecting and monitoring the investment options participants can choose. “Meeting these responsibilities requires an informed and thorough evaluation of both the needs of their plan and the options available in the marketplace,” she writes.

Further, Douglass argues, “employing a good investment selection and monitoring process is a key to meeting fiduciary obligations.” She suggests that this process should include:

  • understanding the plan’s governing documents;

  • meeting regularly to discuss and review the plan’s investment options;

  • considering key attributes of the investment options (such as performance, expenses and volatility) when considering available options; and

  • monitoring investment options chosen for the plan.

And this takes on added importance, argues Douglass, because “Courts are frequently called upon to consider whether a fiduciary’s selection of an investment for the plan was consistent with ERISA’s standards.”

Douglass outlines five guiding principles she posits may be helpful in actively managing a plan’s investment lineup.

1. Fiduciary prudence focuses not on the outcomes of investments, but on the process by which investments are selected and monitored for the plan.
2. Understanding the basis for comparison is necessary in order to make appropriate selections and monitor plan investments.
3. There is no one-size-fits-all way to choose a plan’s investment options.
4. Participant choice has an important place in DC plans and may influence the plan’s investment options — such as whether to use active and passive strategies.
5. Self interest or a litigation avoidance should not motivate the selection and removal of investment options.

These fiduciary standards and guiding principles “do not mandate any particular investment lineup and do not favor the use of either actively or passively managed strategies,” writes Douglass. In fact, she says, “Rather than mandate certain types of investment options for plans, courts instead focus largely on the decision-making process in which the fiduciaries engaged when making investment selections for their plans, and the plan sponsor’s purpose in offering the plan in the first place.” Further, she concludes, employing a deliberative process and plan-specific considerations in choosing active management or other common plan features “is entirely appropriate and consistent with ERISA’s fiduciary standards.”