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A Better Partnership


Oct 2008
October 15, 2008

Fiduciary Prudence In Uncertain Economic Times

Many ERISA plan fiduciaries are questioning their role in light of turmoil in the financial world and a quickly changing environment. The employer/sponsor of an ERISA plan, or a committee appointed by it, is usually the plan fiduciary. The Employee Benefits Group at WNJ suggests that these fiduciaries take the following steps to protect the participants and retirement plans for which they are responsible, and to protect themselves from later challenges.

  • Prudence - Remember that the fiduciary's job is to act in the best interest of plan participants, as a prudent expert would act under the "circumstances then prevailing." If you are not an investment expert, hire an expert to help you. If you have already hired a professional investment adviser, you should stay in contact with that expert through this period for advice on what to do.

  • Process - Process is the key for protecting the fiduciaries. The fiduciary is not a guarantor of performance. As long as you can demonstrate you have followed a prudent process, you should be protected.

  • Document - The process you have undertaken will not protect you if you cannot demonstrate what you did after the fact. Document everything, including all contact with your investment adviser, actions undertaken, investment policy review, fund review, etc.

  • Monitor - You may want to appoint a specific individual or group of individuals to be responsible for monitoring the effect of economic conditions on the plan as they unfold.

  • Investment Policy - If you have an investment policy, now is the time to review it and make sure any action it requires is taken; any other proposed actions should be reviewed under the policy in advance. You may also want to consider whether a revision of the policy is warranted in light of the current circumstances. Any other governance documents should also be included in this review process. If you do not have an investment policy, the WNJ Employee Benefits Group can work with your investment adviser to develop one.

  • Meeting - Given the volatility of current conditions, it may not be considered prudent to wait until your next regularly scheduled committee meeting to discuss the impact of economic conditions on your plan. Even if you ultimately decide to do nothing, a full committee meeting with your investment adviser to discuss whether changes should be made is part of a prudent process under these conditions.

  • Participant Communications -

    • Fiduciary review - Participants should be assured that the plan fiduciaries, with their professional advisers, are investigating the effect of current economic conditions on the plan.

    • Trusteeship of assets - Participants should be assured that their plan assets are held in trust, so that their investments are protected from any creditors of the trustee or any other party involved with the plan. The value of those investments, however, does depend on the value of the companies in which they are invested.

    • Investment Advice - Do NOT provide any advice to participants in participant-directed plans about choices they should or should not make. If participants ask specific questions about what they should do, you can point them to general education materials and advise them to talk to their investment adviser. If the plan or sponsor has made available an investment adviser to participants, refer the participants to that adviser.

    • Investment Education - General education is appropriate as long as it does not cross the line into specific investment advice such as "You should stay in the market." Preferably any educational information will come from the participant investment adviser and include fundamentals on long-term investment strategies, such as dollar cost averaging, the value of asset allocation, risk assessment, etc. General information about the state of the market and historical market performance may also be useful.

  • Fund selection - Your existing fund selection should be reviewed with your investment adviser. Although fiduciaries have considerable protection from investment losses attributable to participant investment elections under plans with ERISA 404(c)-compliant participant-directed investment arrangements, the fiduciary remains responsible for the selection of the funds available to participants. This includes an ongoing responsibility to monitor the funds. Market performance is not the key concern--all equity funds struggle as the stock market plummets. If the fund manager has a good track record over time, even greater losses than peers over a short period of time should not necessarily be a reason to switch funds. The types of concerns that should cause a fiduciary to consider switching are:

    • Stable value funds - Are the wrap insurers that guarantee the dollar value of the funds well-diversified and in good shape?

    • Money market funds - Is the fund participating in the federal guarantee? It is optional and only applies to balances as of September 19, 2008.

    • Bond funds - Are the underlying investments riskier than you were led to believe, or have any of those investments already failed? Should you consider a lawsuit or joining a class action lawsuit to recover losses?

    • Fees - Although fees and expenses are not necessarily directly related to the financial uncertainties, poor market performance attracts attention to excessive fees. If you have not recently reviewed the fees your funds charge and your administrative costs, including hidden costs passed through to the plan assets through revenue sharing, we suggest you do so now.

    • Fund management - Are the managers that have historically managed the fund still in charge?

    • Investment Line-up - You may want to review now whether the plan offers a sufficiently broad range of investment options to permit participants to achieve diversified portfolios.

    • Adviser advice - You should ask the plan's investment adviser whether any current conditions may be having any other effect on your current fund selection and whether a change is warranted.

  • Extraordinary events - Are any extraordinary events planned, such as a plan merger, fund line-up change, blackout period, or implementation of automatic contributions? You should consider whether the event should be postponed or modified in light of current conditions.

  • Funding - Defined benefit plans that were almost "at risk" under the Pension Protection Act standards as of their most recent valuations could easily fall below those thresholds due to investment losses. You may want to ask your fiduciary for a mid-year valuation taking into account current market conditions, so that you can spread any contribution increases necessary to avoid at-risk status over a longer period of time.

  • TARP - Discuss with your investment adviser whether any of the plan's investments, or underlying fund investments, may be held by a financial institution eligible for the federal Troubled Asset Recovery Program, and whether participation is advisable. If so, note that many legal issues would have to be addressed if the plan becomes involved with TARP.

If you have any questions, please contact Mary Jo Larson at 248.784.5183 or or any other member of the Warner Employee Benefits Practice Group.


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