PLANSPONSOR - March - April 2023 - 37

30TH ANNIVERSARY | GOVERNANCE
Some even said, 'We can make this a
differentiator: We're going to assert fiduciary
status,' and they've stayed with that
approach. On the whole, I don't think
things really ever went back to the way
they were. "
Lawsuit Trends
Many of the participant lawsuits filed
over the years have had one or both of
the following themes in their allegations:
that fiduciaries made imprudent investment
choices and/or that a plan's investments
had unnecessarily high fees.
For an example of the first, in Tittle
v. Enron Corp., a class-action lawsuit filed
in 2001, the plaintiffs alleged a breach
of fiduciary duty stemming from many
participants' assets being heavily concentrated
in Enron stock at the time of the
company's collapse. The case ultimately
settled, but it affected plan sponsors'
comfort with investing in employer stock.
" I do think there has been some
trending away from the willingness of
sponsors to have employer stock in their
plan, " Oringer says. " There are some
companies that looked at that Enron case
and said, 'Why do we need employer stock
in our plan anymore, with all these risks?' "
THE RISE OF 'ROBO' WITH
SUNAMERICA'S LETTER
In 2001, the Department of Labor issued an advisory opinion to SunAmerica Retirement
Markets Inc. that paved the way for the use of managed accounts in Employee Retirement
Income Security Act plans.
The advisory opinion, 2001-09A, clarified that a computer-based investment program that
provided unbiased advice to implement a model asset-allocation portfolio-in this case,
SunAmerica hoped, one including its proprietary funds-did not cross the line to become
a prohibited transaction under ERISA, even if the plan's provider or adviser received
additional compensation as a result. " That opened the floodgates to what we now call
robo advice: personalized investment advice but without the human touch " of a person
deciding on the recommendations, says The Wagner Law Group's Andrew Oringer. " Some
employers that desperately wanted a way to help their employees with their investment
decisions now had a feasible way to do so. "
The SunAmerica advisory opinion did establish some conditions, most
importantly in
requiring the company to utilize third-party software, vs. proprietary software, in coming
up with the personalized recommendations. " SunAmerica, to make that prohibited transaction
exemption work, had to hire an independent investment expert and could only provide
investment advice generated by that independent investment expert, " says Fred Reish of
Faegre Drinker Biddle & Reath. " That SunAmerica model never really gained much traction. "
An advice provider needs the SunAmerica approach only if engaging in a prohibited transaction
when providing advice. A number of advisory firms and platform-based advisory
services now use a different model: They offer fiduciary management of participant assets
for a level fee and without conflicts of interest. " That model has been much more successful, "
Reish says. -JW
" Clearly, based on data from the large recordkeepers, there
has been a trend over the past 20 years toward a reduction in the
use of employer stock in plans, " says David Levine, a principal in,
and co-chair of, the plan sponsor practice at Groom Law Group
in Washington, D.C.
As to the second trend, some consider Tibble v. Edison
International, filed initially in 2001, the original excessive fee
case for defined contribution plans. In a 2015 decision, the U.S.
Supreme Court held that a lower court had mistakenly applied
a six-year statute of limitations to the suit's claim on breach of
fiduciary duty. The bottom line of the Supreme Court decision-
and message for plan fiduciaries-was that, regardless of how
long an investment has been on their plan's menu, fiduciaries
have an ongoing duty to monitor the investment.
" The idea that fiduciaries can't just 'set it and forget it' with
an investment menu is pretty well accepted, " Levine says of the
governance implications. " You can't make a selection, wait six
years for the statute of limitations to expire, and then claim that
participants can never challenge the inclusion of the investment
in the plan. "
Edison International's plan included mutual fund share
classes with unnecessarily high fees, as lower-cost share classes
were available to it, Reish says. The case made clear that the fiduciary
duty to monitor investment expenses includes looking at
whether the plan investments are eligible for a lower-fee share
class. " Today, I think that arguments about share classes are
probably the No. 1 claim in fee lawsuits. "
The fee lawsuits have raised fiduciaries' awareness of fees
and understanding that they must consistently follow prudent
processes in evaluating plan costs. " I do think there's a silver
lining to these fee cases: There's an ever-increasing number of
employers who are being more careful with their procedures, "
Oringer says. " There is also a greater tendency for plan sponsors
now to understand the fees their plans are paying and to negotiate
regarding those fees. "
Still, a wariness about fees may prevent many plan fiduciaries
from utilizing investments that could benefit participants
but that carry somewhat higher-than-average costs. " There is
real concern among many that [this wariness] has stifled innovation, "
Levine says. " It definitely has increased caution, which
means that plan fiduciaries don't necessarily look at innovative
solutions. " -Judy Ward
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