Saturday, January 26, 2019

A New ‘Presumption’ of Prudence

Has an index fund become a presumption of prudence?

You may remember that no so very long ago, courts had determined that the holding of employer stock in Employee Stock Ownership Plans (ESOPs) was entitled to a presumption that their fund management was prudent under a “presumption of prudence” standard. That standard was rejected by the U.S. Supreme Court in 2014 in favor of a new one that required plaintiffs to articulate alternatives that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.

Last October a federal appeals court overturned a district court decision regarding an excessive fee suit brought against Putnam Investments by participants in its 401(k) plan regarding the prevalence of proprietary funds in its own plan menu. The district court had ruled that the plaintiffs failed to identify any specific circumstances in which the company and its 401(k) plan put their own interests ahead of the interests of plan participants, and that the plaintiffs also failed to show how Putnam’s allegedly imprudent actions resulted in losses that required redress.

However, upon review the appellate court not only sent the case back for further consideration by the district court, but did so with a new admonition – holding that the burden of proof as to the responsibility for the loss suffered should be on the defendants, rather than the plaintiffs alleging the harm.

In other words, once the plaintiffs established that there was a loss, the defendant has to prove that the loss wasn’t due to a breach of their fiduciary duty. To make matters worse (or at least more confusing), the courts have split on this burden of proof issue. As the Fifth Circuit appellate court acknowledged, the Second, Sixth, Seventh, Ninth, Tenth and Eleventh Circuits have held that the plaintiffs bear the burden of proof, while the Fourth, Fifth, Eighth, and now First Circuits see that as a defendant obligation.

Little wonder that Putnam has petitioned the Supreme Court for a review and resolution of the issue – or that so many entities have weighed in with their support of the plaintiffs in the case (AARP, the AARP Foundation and the National Employment Lawyers Association) and the Putnam fiduciary defendants (the Chamber of Commerce of the United States of America, the American Benefits Council, the Securities Industry and Financial Markets Association and the Investment Company Institute).

In fairness, proving that such losses are a result of a fiduciary breach can be tough – witness the relatively few wins by plaintiffs who have taken that issue all the way to trial (settlement ahead of that seems to be the norm, often just days before). Arguably it could be just as problematic for defendants to refute those claims, even with documentation of a prudent process (the First Circuit ruling speaks to meeting a “burden of showing that the loss most likely would have occurred even if Putnam had been prudent in its selection and monitoring procedures”).

But the most disquieting aspect of the case may lie in the comments by the First Circuit’s Judge William J. Kayatta, Jr. who, dismissing arguments that the shift in burden of proof would undermine plan formation and encourage litigation (“irrespective of the merits”) as crying “wolf,” wrote: “…any fiduciary of a plan such as the Plan in this case can easily insulate itself by selecting well-established, low-fee and diversified market index funds.”

Or under that standard, one might well argue, now be forced to defend a decision to do otherwise.

- Nevin E. Adams, JD

Saturday, January 19, 2019

7 Signs of the Times

A month ago, when we wrote about the 61st Annual Survey of Profit Sharing and 401(k) Plans from the Plan Sponsor Council of America (PSCA), there were several key points highlighted – but there are some interesting findings you might have overlooked.

Perhaps the most significant finding of that survey – the longest running of its kind – was a record employer contribution rate (5.1% of pay) and a total savings rate in excess of 12%, the highest percentage ever recorded in the history of the survey. Also noteworthy was that nearly three-fourths (73.1%) of plans now retain an independent investment advisor to assist with fiduciary responsibilities – up from 69.5% in 2016.

But here are some findings from the survey of plan sponsors that you might have missed.

There’s less ‘waiting.’

Once upon a time, the norm was to have participants wait a year before letting them participate in the 401(k) plan. There was administrative logic in that decision – after all, turnover rates being what they are, why go to the bother of setting someone up to contribute to the plan (and match those contributions) if they were only going to be around for a short time?

But the most recent PSCA survey finds that nearly half (47.2%) of surveyed employers allow for immediate eligibility, and more than half (55.7%) of the largest plans do. In fact, even among the smallest employers, more than a third (35.3%) let workers become participants immediately.

Not to mention that nearly 40% of plans provide immediate vesting for matching contributions.

Sponsors are making savings suggestions.

Nearly a third (31.2%) of plan sponsor respondents say they provide a suggested saving rate to participants, and for more than 4 in 10 that rate is 10% (28.5%) or higher (12.7%).

There’s a growing role for rollovers.

Just under 4 in 10 (39.4%) of responding plans say they actively encourage participants to roll assets into their plan (though that was somewhat less common among the largest plans). Little wonder, since more than 95% of 401(k) plan sponsors say they accept rollovers from other plans.

There’s a real ‘to or through’ target split.

More than half (55.4%) say their target-date fund goes “through” retirement, while the rest have embraced a “to” retirement glide path. Wonder if participants in those plans appreciate the difference?

Participant behaviors are being tracked.

Not surprisingly, and for any number of legitimate reasons, contribution levels are the most monitored participant behaviors. The vast majority (85%) of the largest plans do so, as do nearly two-thirds (62%) of the smallest. What’s a bit striking is that the second most monitored behavior – and one that held true against nearly all plan sizes (except the smallest, where it was third,after investment allocation) – was loan usage.

Does anything happen with this tracking? About half (45.4%) of plan sponsor respondents said they took action based on what they learned from monitoring participant behaviors.

Traditional success measures (still) matter most.

While more than three-quarters (84.8% of the largest plans) evaluate whether their plan is successful, the benchmarks used are fairly traditional. Participation rates are the most common (90.8% of all plans), with deferral rates (75.8%) looming large, but a distant second. Fewer than a third (31.4%) use income replacement ratios.

Many weren’t looking to make big changes.

More than a third (34.7%) planned no changes at all, and even more (39.9%) planned only “minor changes to the investment lineup.”

- Nevin E. Adams, JD
More information about the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans is available at

Saturday, January 12, 2019

4 All Year Long ‘Resolutions’ for Plan Fiduciaries

This is the time of year when resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are four for plan fiduciaries to keep in mind all year long.

Find your plan document(s) – and read them.

One of the key guiding principles for plan fiduciaries is something called the plan document rule, which says the fiduciary must follow the plan unless the terms of the plan contradict the rules of ERISA. So, first and foremost, I’m not sure how you follow the terms of the plan document if you haven’t read the plan document.

It’s incredibly easy in this hectic day and age for certain practices to take root and become part of “the way we’ve always done” things, and yet be at odds with the actual plan language.

Indeed, while a plan document isa legal document, and often uses language that seems designed to undermine a clear and practical application of its terms, I’m always amazed in my random queries to plan sponsors how many haven’t read it – or haven’t read it recently, though they nearly always have some idea as to where it has been stored for safekeeping.

Oh – and while you’ve got the document in hand, make sure that it’s been kept up to date. The laws do change, and – particularly if you’re relying on an individually designed plan – it’s easy to overlook the need to make changes to the legal document that governs your plan.

Make sure your target-date funds are (still) on target.

Still another guiding fiduciary principle is the diversification rule. This says that a fiduciary must ensure that the plan offers a wide range of investment options to help participants meet their investment needs and diversify their investments accordingly. And when it comes to such things, it’s hard to imagine a more apt focus than the default investment choice of the past decade – the target-date fund (TDF).

Sure enough, flows to target-date funds have continued to be strong – and little wonder, what with their positioning as the qualified default investment alternative (QDIA) of choice for most 401(k)s. That said, the vast majority of those assets are still under the purview of an incredibly small number of firms, though as recently as 2016, 3 of the 10 largest target-date managers experienced outflows for the year. According to Morningstar’s “2018 Target-Date Fund Landscape,” nearly 95% of the $70 billion estimated net flows to TDFs in 2017 went to target-date series that invest predominantly – i.e., at least 80% of assets – in index funds.

That said, the average target-date fund lost 4% last year through Dec. 10, according to Barron’s (citing Morningstar), while the S&P 500 is up just under 1%. In fact, not one of 664 target-date funds on the market, which together hold more than $1.1 trillion in assets, has had a positive return, according to Morningstar – though it’s the first time in a decade that target-date funds have posted widespread losses.

A target-date fund is, of course, a plan investment, and like any plan investment, if it fails to pass muster, a plan fiduciary would certainly want to remedy that situation, including removing the fund if necessary (don’t take my word for it – that’s coming straight from the Labor Department).

The reasons cited behind TDF selection run a predictable gamut; price/fees, performance (past, of course, despite those disclaimers), platform (as in, it happens either to be their recordkeepers, or compatible with their program) – and doubtless some are doing so based on an objective evaluation of the TDF’s suitability for their plan and employee demographics. Whatever your rationale, it’s likely that things have changed – with the TDF’s designs, the markets, your plan, your workforce, or all of the above.

Regardless, it’s probably time you took a fresh look.

Figure out what your plan costs.

Another of the key principles is the exclusive benefit rule, under which a fiduciary must operate the plan in a way that solely benefits participants and beneficiaries, and these days a key element of that has been paying only reasonable expenses for services rendered.

And while it’s perhaps not that unusual for plan fiduciaries to do an analysis at the plan level, this time it might be worth also picking a couple of representative individual accounts, and coming up with a dollar figure (rather than a basis point rendition) for what they are paying each year. Including your own.

Now, in order to do so, at an individual or plan level, you must of course know the services rendered, by whom and how they are rendered, and what fee(s) are paid for them. And then you have to decide if it’s reasonable (and while it’s often glossed over, not just the fees but the services).

But if you don’t know the first part, you can’t determine the last. And if you can’t do that, you aren’t fulfilling your duties as a plan fiduciary.

And that could be trouble. For the participants, for the plan – and, ultimately, for you.

Assess your expert-ise.

A final ERISA fiduciary principle is something generally referred to as the “prudent expert” rule, often labeled the highest duty known to law. It requires that a fiduciary perform its duties “with the care, skill, prudence and diligence under the circumstances then prevailing, that a prudent man acting in like capacity and familiar with such matters would use.” That rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must do so at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard.

The Department of Labor notes that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

In fact, you might want to start here. It could make fulfilling those other New Year’s Resolutions all the easier…

- Nevin E. Adams, JD