Saturday, May 25, 2019

4 Fiduciary Lessons from the Game of Thrones

I was late to the Game of Thrones – and though its final season seems a bit “rushed” – there has been plenty to not only watch, but mull over in its eight-season run. And yet, as the series wound to a close on Sunday night, I kept thinking there were some lessons for retirement amidst the mayhem.

‘A man’s gotta have a code.’

Sandor Clegane (a.k.a., the Hound) had some of the best quotes during the series run (though most of them are not “printable” here). This is one for the ages, and while he drew this particular line in a conversation with Arya Stark about his choice between being a thief (not OK) and a murderer of young boys (OK?), for Sandor, he did at least have a personal, if not, “professional,” boundary which governed his actions.

Of course, plan fiduciaries have not one, but two to keep in mind: ERISA – and the Internal Revenue Code.

‘No one can survive in this world without help. No one.’ 

Jorah Mormont’s words of wisdom to his “Khaleesi” (Daenerys Targaryen) are broadly applicable, of course, and in the retirement context both to individual retirement savers seeking help, as well as the employer/plan sponsors looking to provide plan designs that are prudent and effective in helping them do so.

ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law – and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

The “familiar with such matters” is the sticking point for those who might otherwise be inclined to simply adopt a “do unto others as you would have others do unto you” approach. Similarly, those who might be naturally predisposed toward a kind of Hippocratic, “first, do no harm” stance are afforded no such discretion under ERISA’s strictures.

It’s one thing to find yourself in a job for which you are not immediately trained, or perhaps even qualified, but there’s no beginner track for ERISA fiduciaries. You’re not only directed to act for the exclusive purpose of providing benefits, but to do so at the level of an expert. The DOL has said that “Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert."

The simple matter is, as an ERISA fiduciary, you’re expected to conduct yourself as an expert – or to hire help that is.

‘Sometimes nothing is the hardest thing to do.’

While that can certainly be true in times of volatile markets, most participants – certainly those who have the benefit of automatic enrollment, contribution acceleration and qualified default investment alternatives – have, despite Tyrion Lannister’s Season 7 counsel to Daenerys Targaryen – long found that “nothing” is actually not only easy, but in many, and perhaps most, cases a better result than they might have managed on their own.

That said, “nothing” has been the bane of any number of plan fiduciaries on matters ranging from conducting regular provider evaluations, prudent examinations of plan investment options, removal of imprudent options, and documentation of their deliberations.

In those situations, “nothing” was likely not the hardest thing to do – though it certainly had its hazards. This might be a good time to revisit “6 Dangerous Fiduciary Assumptions.”

(In the bear-in-mind department, Daenerys Targaryen later pushed back on Tyrion’s counsel by declaring “You told me to do nothing before and I listened to you. I’m not doing nothing again.”)

‘No matter who you are, no matter how strong you are, sooner or later, you’ll face circumstances beyond your control.’ 

While she never really carried on as though she thought this applied to her, none other than Cersei Lannister offered these words of wisdom to her (really nasty) son Tommen Baratheon in Season 5 (ironically, before she found out for herself the awful truth of those words).

Whether the source is the markets, regulations, legislation, litigation, workforce dynamics in general, or all/some of the above, plan fiduciaries have to know that circumstances may well drive them out of their comfort zone, regardless of how carefully or thoughtfully they have tried to prepare for that eventuality.

The good news is, ERISA requires prudence, not perfection.

- Nevin E. Adams, JD

Saturday, May 18, 2019

A Good Example

Mothers give us a lot, not the least of which is life itself. But as I was reading through all the accolades on social media over the weekend, I couldn’t help but be reminded of all my mother gave me.

As is the case in many families, “Mom” was our family’s CFO. See, like many in his generation, my dad wanted to hold the checkbook, but it was Mom who always made sure that there was money in the account. She’s the one who started setting aside money from her paycheck in her 403(b) plan at work – and continued to do so, even when my father was convinced they couldn’t afford it – and made no secret of that opinion. Or did until he got a glimpse of the statement that showed Mom’s retirement account growth – and then, inspired by that example – he began setting money aside for retirement as well.

Not surprisingly, Mom was the one who encouraged me to start saving in my workplace retirement plan as soon as I was eligible – and while I wasn’t always smart enough to take Mom’s advice in every situation, I’m happy to say that on this one I did.

Now nearly 89, Mom’s still independent, vibrant, and financially self-sufficient – and that’s no accident. A school teacher, she took a fairly significant (and unpaid) “sabbatical” so that she could stay at home with her four kids until the youngest was ready to head off to school. When she returned to work she was covered by a state pension plan, and one that required from her paycheck a much more significant contribution than most choose to defer into their 401(k) today. She even saved diligently to buy back the service credits she had forgone during the years she worked in our home without a paycheck, in addition to her 403(b) contributions (and for all the nonsense that gets the headlines about advisors in the K-12 space, the one Mom worked with for years did just fine by her).

Indeed, generally speaking, women face many more challenges regarding retirement preparation than men. They live longer (and thus are likely to have longer retirements to fund), tend to have less saved for retirement (a result of lower incomes, as well as more workforce interruptions, both when children are young, and as their parents age), and in addition to longer retirements, those longer lives mean that they are also more likely to have to fund what can be the catastrophic financial burden of long-term care expenses. Among the unexpected expenses in retirement – as parents all know, are those related to your kids – because, even after they leave home and have kids (and expenses) of their own – they’re still your kids.

Sadly, because we know how much difference it can make in retirement savings, women are less likely to work for an employer that offers a retirement plan at work – and to be part-time workers, and thus less likely to be eligible to participate in those plans even when they do have access. Oh, and like my mother, they tend to outlive their spouses – often by far more than the variance in average life expectancy tables suggest.

Yes, nearly a quarter century in, Mom’s sacrifices over the years (and they continue to this day) have allowed her to have a retirement that is, while certainly not luxurious, comfortable. Oh, like many in her generation, she’s worried about being a “burden” to her family, though – because of her preparations, there’s not much chance of that.

What she is – certainly to this grateful offspring – is a (very) good example.

- Nevin E. Adams, JD

Author’s Note: My mom’s example isn’t the only inspiration to be found around us. The upcoming Women in Retirement Conference will feature, among other things, an exciting panel comprised of the leadership of the American Retirement Association, and its member associations – all women! It’s going to be an incredible event, with lots of inspiration – and examples! 
Find out more at

Saturday, May 04, 2019

Business As Unusual: Fiduciary Do’s and Don’ts

Plan sponsors often gloss over the reality that they are ERISA fiduciaries – or think that if they have hired an advisor, they’ve basically hired a stand-in for that responsibility. But there’s another mistake that even the most well-intentioned make – with remarkable frequency, based on what I hear from advisors.

In the marketplace, it’s normal – even expected – that firms extend more favorable terms and/or discounts to those who do business with them across various offerings. But those “normal” practices can cause you trouble when it comes to doing business with ERISA-governed plans. Here’s how:  

If you make decisions regarding the plan or plan assets, you’re an ERISA fiduciary.

If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. Ditto if you are able to hire individuals that control or direct the investment of those assets.

Plan decisions you make as an ERISA fiduciary – including hiring those who provide plan services – must meet certain criteria.

With regard to what a fiduciary must do, the Employee Retirement Income Security Act, or ERISA, sets out a number of requirements for plan fiduciaries in what are generally referred to as the “prudent man” rule, the duty of loyalty and the “exclusive benefit” rule.

Taken in their entirety, this means that plan fiduciaries must carry out their duties as would “a prudent man engaged in a like capacity and familiar with such matters,” to act “solely in the interest” of plan participants and to act for the exclusive purpose of providing retirement benefits to participants. Those duties include the selection and monitoring of providers – and those must be done for the exclusive benefit of participants and beneficiaries. Failing to do so constitutes a breach of your fiduciary duty – and this has been the underlying allegation in just about all of the recent litigation regarding ERISA plans.

There are also certain things you can’t do as an ERISA fiduciary.

Fiduciaries may believe that, in order for a conflict of interest to exist, the fiduciary must somehow act in a manner that is bad for the plan, but ERISA outlines a number of actions that fiduciaries may not take, generally referred to as “prohibited transactions.”
The transactions that constitute an unlawful exchange between a plan and a party in interest, or prohibited transaction, involve the sale, exchange or lease of property; lending of money or other extension of credit; furnishing of goods, services or facilities; or a transfer or use of plan assets. A disqualified person who takes part in a prohibited transaction must correct the transaction and must pay an excise tax based on the amount involved in the transaction.

Note that if a conflict of interest is precluded under ERISA's prohibited transaction rules, the fiduciaries cannot, as a matter of law, allow the plan to become a party to the transaction – even if the action were otherwise reasonable or profitable to the plan. There are exemptions to some of these prohibited transactions, but without that, fiduciaries are absolutely prohibited from entering into a contemplated transaction – even if doing so could otherwise be considered “prudent.”

Businesses make “relationship” deals all the time – ERISA-governed plans can’t.

Remember that as an ERISA fiduciary you have a legal obligation to act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them. 

So, let’s say the local financial institution, currently bidding on the opportunity to manage your plan’s assets, wants to acknowledge the “value of the expanded relationship” by extending a more favorable interest rate, or to expand the firm’s existing line of credit were they to be awarded the plan business.

From a customary “doing business” standpoint, this probably wouldn’t raise any red flags – but then, ERISA isn’t “customary” – and from that standpoint, there are red flags aplenty.

The clear intent of the offer is to reward the decision to award the plan business to the financial institution, or at least to acknowledge that the financial institution is willing to view its business holistically. That said, when it comes to dealing with an ERISA plan, fiduciaries must make those decisions in isolation – solely is the operative word here – and a decision to transfer plan assets in exchange for better banking terms for the company fails that test.

Specifically, it violates 406(b)(1) and (3) because the responsible fiduciary has dealt with the assets of the plan for the benefit of an entity other than the plan participants and beneficiaries. Nor does it matter that as employees of the firm there might be some incidental benefit from the enhanced LOC. Why? Because the decision wasn’t made for the exclusive purpose of providing benefits, nor was it solely in the interest(s) of plan participants and beneficiaries.

What could be worse?

Worse – imagine a situation where the fees or services offered to the plan by the financial institution aren’t the top choice of the plan fiduciaries/committee. Again, in a “customary” business transaction, it’s not unusual to consider the entire relationship, to weigh the breadth of services and costs in totality.

But ERISA isn’t customary – and if better options were readily available, and there is no specific plan benefit justifying the transfer, the plan fiduciaries have run afoul of the duty not only to act prudently, but to do so for the “exclusive purpose” of providing the retirement benefits to plan participants and beneficiaries. And, depending on the nature of the transaction, they may well have run afoul of ERISA’s prohibited transaction restrictions.

Remember that your liability as an ERISA fiduciary is personal.

There are any number of things that can go wrong in running a workplace retirement plan. That’s why it’s important to hire experts – and to keep an eye on them. But don’t forget that ERISA fiduciaries – and your decision as a committee member means that you’re one - can be held personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.

The bottom line: When it comes to dealing with ERISA plans, plan fiduciaries are well-advised to consider if anyone other than the participants benefits as a result of the selection of a service provider or an investment decision. And if so, to tread carefully – very carefully.

- Nevin E. Adams, JD
Note: For a more extensive analysis on the subject, I am indebted to the work of Fred Reish who has on this topic, as on many others over the years, provided excellent insights, including this one.