Time to Take Fiduciary Inventory ©

Getting on Board
May 19, 2014
Where are the Women Directors?
August 6, 2014

The last five years have witnessed many changes in the retirement plan fiduciary landscape, perhaps more than in any five year period since the enactment of ERISA in 1974.  These changes are leading many plan sponsors and advisors to adopt new strategies in managing their fiduciary responsibilities.

Fiduciaries appointed to manage a retirement plan and its assets owe their fiduciary responsibilities exclusively to the participants.  In this regard, they are charged with making informed and reasoned decisions when they make changes to the way in which they discharge their responsibilities.   Accordingly, before changing the fiduciary hierarchy or fiduciary process plan fiduciaries need a good understanding of the responsibilities involved in managing plan assets, what changes now impact those responsibilities and where there are weaknesses in their process.

Post 2008 Fiduciary Landscape

The capital markets meltdown in 2008 had an immediate impact on long held views on investment management.  Suddenly, asset classes became more closely aligned, putting into question Modern Portfolio Theory and traditional ideas of asset allocation and portfolio construction.  At the same time, new and sometimes complicated investment products and strategies emerged leading some investment committees to become indecisive and some bright wag to describe this phenomenon as “fiduciary fatigue.”


On the legislative front, in an effort to address issues that contributed to the 2008 meltdown, Congress introduced The Wall Street Reform and Consumer Protection Act. This was passed in 2010 and imposed more stringent regulation on financial institutions, including hedge funds, and requires the SEC to address the fiduciary standing of broker/dealers, many of whom act as advisers to retirement plans, but not in a fiduciary capacity.

ERISA Regulation

At the same time, the Department of Labor (DOL) introduced new regulations under ERISA §408b-2 and §404a-5 to increase disclosures made to and by retirement plans, with particular focus on 401k plans.  The former regulation requires disclosures by service providers of their services, compensation and fiduciary status and impose an obligation on plan fiduciaries to evaluate those disclosures to determine that the arrangements are reasonable in order to avoid an ERISA prohibited transaction.  The latter regulation requires 401k plans to make detailed disclosures to plan participants of administrative and investment related expenses and of investment performance.  The regulation increases the scope of disclosures required to justify a claim of relief from fiduciary liability under ERISA §404c and requires the disclosures as a fiduciary duty, effectively turning notions of fiduciary relief on their head.

Fiduciary Breach Litigation

The last five years have also seen an increase in fiduciary breach litigation, initially with inconsistent results.  Household names such as United Technologies, Unisys, Deere, Lockheed Martin (now remanded for trial), and IPC saw fiduciary breach claims against them dismissed, while others, such as General Dynamics, Kraft, Bechtel, Caterpillar and Wal-Mart reached settlements rather than risk higher costs and damage awards. Some more recent cases have survived motions for dismissal, leading to decisions which reaffirm fiduciary duties and include, in some cases, significant damage awards.  While some of these decisions are under appeal, it is apparent that the courts are no longer giving deference to plan sponsors in adjudicating such claims. Plan fiduciaries need to take note.

The ABB Decision

Consider the case, now on appeal, of ABB, the leading power and automation technology group, which was sued by its 401(k) plan participants back in 2006 for a variety of fiduciary breaches.  The claims survived various motions for dismissal leading to a trial in 2010 and a final $35.2 million judgment in favor of the plaintiffs in March 2012 (Tussey v. ABB, Inc., No. 2-06-CV-04305, 2010 U.S. Dist. LEXIS 45240 (W.D. Mo. Mar. 31, 2012)). The Court found that the ABB fiduciaries violated their ERISA fiduciary obligations to the plan when they:

  • Failed to monitor recordkeeping costs and negotiate rebates available to the plan;
  • Selected more expensive share classes when less expensive share classes were available;
  • Failed to abide by selection and monitoring criteria contained in the plan’s investment policy statement when changing fund options in the plan’s investment menu;
  • Agreed to pay Fidelity higher than market costs for recordkeeping in order to subsidize corporate services provided by Fidelity to ABB.


As part of the judgment, the court also found that Fidelity was a fiduciary to the plan and breached its fiduciary obligations when it failed to distribute for the benefit of the plan “float” income, i.e. interest on monies held pending reinvestment, and when it transferred that income not to the plan but to the investment options.

The Edison Decision

More recently, the 401(k) decision in the 9th U.S. Circuit Court of Appeals on March 21, 2013 in Glenn Tibble et al. vs. Edison International et al. found that the company breached its fiduciary responsibilities in selecting retail-class shares in an investment fund by failing to investigate the availability of cheaper, institutional-class shares in the same fund.  In holding the defendants liable, the Court opined that the plan’s pension consultants were not acting as fiduciaries and that the plan fiduciaries could not rely on their advice without independent investigation, highlighting the need for plans to replace consultants if their service agreement abdicates fiduciary responsibility.  Another finding held that ERISA Section 404(c) did not relieve fiduciaries from liability for fund selection because that relief is available only when losses result directly from a decision made by a participant.

The Lockheed Martin Appeal

This was followed by a decision in the appeal from the dismissal of the 2006 claim against Lockheed Martin.  In Abbott v. Lockheed Martin Corporation (N0. 12-3736), the Seventh Circuit Court of Appeals reversed the lower court’s ruling, defined the class of plaintiffs entitled to pursue the claims and remanded the case for further proceedings.  This will allow a trial on the facts of the plaintiff’s claim that plan fiduciaries imprudently selected for inclusion in the investment menu a stable value fund where, rather than containing a mix of short- and intermediate- term investments, the fund invested in short-term money market funds that did not beat inflation sufficiently to provide a meaningful retirement asset.  This is the first 401k decision where the conservative nature of an investment has been questioned for underperformance.

Defined Benefit Plan Litigation – Weyerhaeuser

Litigation has also involved defined benefit plans.  This is uncommon because investment outcomes don’t generally impact retirement benefits which are effectively guaranteed.  This was demonstrated in a recent decision in Palmason v. Weyerhaeuser Co., W.D. Wash., No. 2:11-cv-00695-RSL, 8/23/13, involving claims that Weyerhaeuser had adopted imprudent investment policies and guidelines with regards to the total exposure/risk of the investment portfolio.  On a Motion to Dismiss, the Court dismissed claims for monetary damages because the plaintiffs could not show that the alleged breaches created an appreciable risk that the defined benefits would not be paid.  However, the court did allow claims for equitable injunctive relief to continue.  These claims, that the plan fiduciaries failed to sufficiently diversify assets and that their investment policy did not exclusively benefit plan participants but served to increase Weyerhaeuser’s net income and stock price for the benefit the company and senior executives, will now be set down for trial.

Plan Sponsor and Investment Advisor Reaction

All of these developments have had an impact on plan sponsors and investment advisors, as well as on the DOL.  This impact manifests itself in a number of ways.

Outsourcing Investment Function

Investment advisors who generally have played a consulting or non-discretionary advisory role as co-fiduciaries with investment committee members now  offer to become discretionary managers of plan investments and portfolio construction, thereby relegating investment committees to a purely oversight function.  These services are sometimes referred to as “Outsourced CIO” “Implemented Consulting” or “Fiduciary Management”.  Such offering are intended to combat “fiduciary fatigue” by making the investment process more nimble and by sheltering investment committees from liability that neglect or an ill-advised decision can create.

Plan Design Changes

As a further means of insulating plan sponsors from fiduciary responsibility, a strategy finding currency in some quarters would have the plan document amended to identify a specified advisor as the “named fiduciary”, thus removing the plan sponsor from the reach of ERISA’s fiduciary regulation.  The appointment of the advisor in this manner would be regarded, so the argument goes, as a “settlor” function where the courts give deference to employers in making “plan design” design decisions outside of the cloak of fiduciary responsibility.  Whether risk management in this form benefits the plan participants or indeed the company’s stockholders, who see employee benefits as necessary to employee recruitment and retention, is something each employer must consider, but it is clear that increasing focus on fiduciary responsibility is leading to innovative, albeit more costly, risk management schemes.

The Call for Fiduciary Training

Finally, atop its ivory perch, the DOL watches the changing fiduciary landscape and enquires as part of its investigation of retirement plans whether trustees and investment committees are getting sufficient fiduciary training to properly discharge their responsibilities.  Such enquiries are becoming widely reported by attorneys, such as Trucker Huss, Brian Cave and others who represent plan sponsors.  Will fiduciary training become a regulatory requirement?  It’s too soon to tell but this expansion of DOL enquiry, if nothing else, is recognition of the increasing complexity of fiduciary responsibility.

Time to Take Fiduciary Inventory

So what should plan sponsors do in the face of this onslaught?  The first thing is to avoid over reaction.  While investment outcomes are important, investment committees who follow prudent practices and are achieving their investment goals should have few concerns, other than to remain current with fiduciary developments.  Those who have let their retirement plans suffer from benign neglect, which should be difficult in light of the recent DOL regulation noted earlier, need to get their fiduciary house in order.  In any event, taking fiduciary inventory is recommended for all plan sponsors.  This would involve:

  1. Analyzing the plan’s investment committee, its composition and structure, its familiarity with investment matters, the frequency of meetings and minute taking procedures and outcomes, as well as its adherence to the plan’s investment policy statement.
  2. Identifying the plan’s service providers and evaluating their service arrangements and compensation as required by ERISA 408b-2 requirement.
  3. Benchmarking fees and expenses, a primary target of DOL examinations and fiduciary breach claims.
  4. Determining the fiduciary knowledge base of investment committee members and the need for fiduciary training, whether on a one time or periodic basis.
  5. Evaluating the effectiveness of the investment committee and the plan’s service providers in conforming to prudent practices and determining whether an independent evaluation of such matters would strengthen the committee’s effectiveness and provide comfort to the board of directors, particularly outside directors, that a crucial part of the company’s employee benefits program and a source of fiduciary liability is properly managed.


Taking fiduciary inventory represents prudent fiduciary oversight for any plan sponsor.  For those contemplating a change in their investment and fiduciary risk management process, such a measure is a necessary component to making an informed and reasoned decision.

October 28, 2013

Roger Levy, LLM, AIFA®

Managing Director

Cambridge Fiduciary Services, LLC


©Cambridge Fiduciary Services, LLC (2013)

Free demo