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| Fiduciary Focus: Providing Value to Sponsors of Retirement Plans |
| by
W. Scott Simon
| 01-03-08 |
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The Pension Protection Act, signed into law by President Bush in August 2006, provides safe harbors for the sponsor of a qualified retirement plan if the sponsor follows the necessary procedures to implement the limited protections of section 404(c) of the Employee Retirement Income Security Act of 1974 and a qualified default investment alternative.
These safe harbors protect a plan sponsor against certain risks at the participant level of decision-making. While that's nice, it does nothing to reduce or mitigate the inherent risks at the plan level of decision-making. Yet it's at the plan level where an investment advisor to retirement plans can really provide significant value to plan sponsors. ERISA attorneys advising plan sponsors can provide critical help in this area.
Mother Always Said to Eat Your Spinach
The Employee Retirement Income Security Act of 1974 requires, among other things, that the fiduciaries of a qualified retirement program such as a 401(k) plan provide plan participants with a prudent variety of diversified investment options. This can be likened to a duty to provide participants with a menu of healthy foods.
ERISA also requires plan fiduciaries to ensure that participants make prudent asset allocation decisions for their plan accounts. This can be likened to a duty to make sure that participants actually eat the healthy food provided to them. If a participant fails to eat its food (makes imprudent asset allocation decisions), plan fiduciaries can incur liability.
A way for fiduciaries to avoid liability for the risk that plan participants might fail to eat their food is to secure the limited protection of ERISA section 404(c). (To obtain such protection, a 401(k) plan must be "participant-directed," which is conditioned on a plan participant "exercising informed control" over the investments in its account which is conditioned on the ability of the participant to have the opportunity to choose from a "broad range" of investment options.) ERISA section 404(c) has been available to sponsors since 1992, and certain of its limited protections have been clarified and extended in the Pension Protection Act.
Spinach Spoiled by High-Cost, Underdiversified, Poorly Performing Investment Options
The Pension Protection Act provides safe harbors, as noted, if a plan sponsor follows the necessary procedures to implement the protections of ERISA section 404(c) and a qualified default investment alternative. This protects a plan sponsor at the participant level because it allows the sponsor to avoid liability for the stupid investment mistakes that might be made by plan participants.
While these safe harbors are all fine and dandy, in many cases they really don't have much value to plan sponsors (or plan participants, for that matter). Why? Because their value is predicated on the assumption that plan fiduciaries will do a prudent job of selecting and monitoring (and replacing, if necessary) the investment options of the retirement plan for which they're responsible.
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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