The United States Department of Labor recently commenced legal
action against a plan investment manager who failed to diversify
plan investments, then sold the portfolio and left the proceeds
uninvested for a period of two months, causing $7 million in
losses. The complaint also named members of the
Retirement Committee that retained the manager, and particularly
cited them for failing to monitor the investment manager and take
action to correct this problem. In addition to seeking restoration
of plan losses, the complaint asks the court to remove the
committee members and appoint an independent fiduciary in their
This complaint serves as a forceful reminder to plan committee
members that their responsibilities to monitor investment managers
are ongoing and don't end when the hiring process is
What Happened Before?
The Department of Labor filed its suit in Pennsylvania, but
there is existing litigation in New York involving these same
parties and plans. In that case, a lawsuit was initiated by the
plan's Retirement Committee after it had fired the adviser in
2009, alleging the same fiduciary breaches as the recent Department
of Labor complaint.
Earlier this year, the New York court issued a key ruling that the adviser was functioning as
an ERISA fiduciary with respect to the plans, and a trial was
held over the summer. We are awaiting a decision on the merits in
New York. If the New York court orders the manager to make up the
$7 million in losses and it does so, it may affect the relief
sought by the Department of Labor, as the plans should not have a
right to a double recovery.
Asleep at the Switch?
Despite the fact that s the Retirement Committee woke up and
attempted to address past wrongs, the lawsuit did not protect these
Committee members from being investigated and ultimately sued by
the Department of Labor.
Committees need to meet regularly and establish procedures for
regularly monitoring the service providers they hire. These plans
apparently had an investment policy requiring proper
diversification. A regularly scheduled review process would have
brought the manager's inaction to the committee's
attention. But too often, pension plan committees have irregular
meetings without formal agendas, and as a result are taking huge
risks by demonstrating lack of accountability. The lawsuit also
revealed the fact that the retirement committee gave the manager
authority before the agreement defining the manager's
obligations was actually finalized, which is another red flag that
this committee was not following good fiduciary practices.
Who Else Could Be Liable?
Members of the board of directors of the plan sponsor have a
residual fiduciary responsibility to prudently appoint and monitor
the named fiduciaries, including committee members, that they hire.
Although they were not named in the Department of Labor's
complaint, as we discussed in our recent webinar on "The Intelligent
Fiduciary", the board can never shed all of its fiduciary
responsibility by delegation to a pension committee or hired
advisors. We can conceive of situations in which the members of the
board would also be named as defendants in actions such as this
because they failed to adequately supervise the committee.
The Bottom Line
Plan participants suffer most when the supervisors fail to
supervise, but the supervisors are also exposing themselves to
material liability for losses and lost profits when they fail to
review what their service providers are doing. Establishing and
following good plan governance practices is the best way to protect
everyone involved. Those practices should include requiring all
investment professionals who manage plan assets to acknowledge
fiduciary status in their service agreements. Establishing a
pre-determined schedule to meet with advisors is also a good idea,
although it doesn't relieve the fiduciaries of their duty to
review advisor activity between meetings.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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