PLANSPONSOR - February/March 2020 - 16

COVER STORY | THE CASE FOR A PROCESS
decisions, including the use of actively
managed funds. " If you follow a prudent
process, you're going to be fine, " Banish
says of the bottom-line message.
The use of active vs. passive funds
has been mentioned in many 401(k)
lawsuits, says Josh Itzoe, a partner in
Greenspring Advisors, Towson, Maryland,
and managing director of the firm's institutional
client group. " Plaintiffs' attorneys
are really attacking that angle, because the
vast majority of active managers underperform
the indexes they track, " he says.
But nothing in ERISA says fiduciaries
may not select actively managed
funds, says ERISA attorney Andrew
Oringer, a partner in law firm Dechert
LLP in New York City who also advises
on best practices. " The key is that fiduciaries
should be aware of the countervailing
issues, " he says. " You shouldn't
just sleepwalk through the fact that active
management can have higher fees than
passive management has, for example.
And, if a committee decides to pursue
active management, it can be important
ESG: AN EMERGING
FIDUCIARY CONCERN
THE USE OF ENVIRONMENTAL, social and governance (ESG) funds in retirement
plans is an emerging legal issue, say Andrew Oringer of Dechert LLP. Some
research has found that ESG funds have underperformed conventional equity.
" You have this concern that an emphasis on ESG is inappropriate, because of the
heavy drive embedded in ERISA [Employee Retirement Income Security Act] to
worry only about investment returns, " he says.
Conversely, some say not using ESG could sacrifice future returns, because
ESG-focused companies may do better over the long term, he says. He points to
an Australian case in which a Millennial participant filed suit last year against
his pension fund, the Retail Employees Superannuation Trust, for not adequately
assessing or disclosing the impact of climate change on its investments. The suit
poses an interesting question, he says: Are fiduciaries affirmatively obligated to
consider ESG issues when choosing plan investments?
" I personally think the law has not yet developed to the point that a plaintiff's
lawyer will soon be bringing a case in the U.S. that says a plan sponsor
is insufficiently taking ESG into account, " Oringer says. " I do think, though,
that we're getting close to the time at which it makes sense, at the least, to have
ESG be in the pool of things on which you educate yourself. " -JW
to articulate why it believes that will benefit participants. "
Analyze revenue sharing's impact on net costs. A number
of court decisions such as Tibble v. Edison International have
affirmed that the use of revenue sharing in plans is not inherently
imprudent, Banish says. " The key for a fiduciary is to
understand exactly how much money that revenue sharing is
generating, " he says.
Tibble, a U.S. Supreme Court case decided in May 2015, Banish
notes, " ruled that there is nothing wrong per se with revenue
sharing. But the inquiry does not stop there: Even Tibble stated
that fiduciaries should not be driven to select funds because they
offer the benefit of revenue sharing. The 9th Circuit remanded the
case back to the district court to apply the new fiduciary standard
described in the Supreme Court decision. The district court ruled
in favor of plaintiffs on a failure to monitor the plan's investments,
which did not change the Supreme Court's ruling that revenue
sharing is not wrong per se. "
The " cosmetics " of revenue sharing now concern many sponsors,
Oringer says. " It looks like things are going on behind the
scenes, and explaining it to participants is complicated, " he says.
" The problem with that thinking is that a revenue-sharing structure
could end up offering a better economic result[-i.e., a lower
fee-]for participants. When you take all the revenue sharing out
and put in a more straightforward administrative-fee system, it
may or may not give the best economic result to participants. "
16 PLANSPONSOR.COM February - March 2020
Cammack Retirement Group Inc. now encourages sponsors
to go with zero-revenue-share funds when they are available,
says Earle Allen, a partner in the firm's New York City office. But
when a manager offers both options, it is important, he says, to
understand which has the lowest net cost, in terms of investment
and administrative fees, for participants. " With some investment
managers, the lowest net-cost share class might be the one with
revenue sharing, " he says. " For sponsors, it's about having the
conversation and talking about the ramifications of the choices. "
Scrutinize administrative-fee allocation. If plan sponsors opt
to eliminate or curb the use of revenue sharing, they need to think
carefully about which method of charging an explicit participant
administrative fee creates the most equitability across their
participant base, Itzoe says.
The allocation of administrative fees to participants is
getting much more attention now, says Todd Solomon, global
practice group leader of the employee benefits group at law firm
McDermott Will & Emery in Chicago. " There's more focus on
what's the fairest way to charge the fees: Is it on a per-head basis,
or a pro-rata [asset-based] basis? Larger plan sponsors have moved
significantly to a per-head fee. But in the small-plan space, it might
be pretty significant to charge $100 per head, because of the lower
asset base, so they may use an asset-based fee more often. "
Some ERISA attorneys say that sponsors should always utilize
a flat, per-participant fee, to be as fair as possible, Allen says. But
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