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Percentage of trustee/participant directed 401k plans


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16 hours ago, QDROphile said:

Can you point to any evidence that shows a fiduciary who acts responsibly and in good faith (stealing is no fair) has anything to worry about? 

Quite a while ago (2009?), I recall a lawsuit by an older participant who sued when the market fell because the participant claimed that he/she would have chosen a more conservative allocation but the plan had just one investment choice.  I doubt that I could find it and just because there was a lawsuit doesn't tell us how much the case settled for.

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I am confused by "one investment choice".  If there is one investment fund, there is no choice.  If that is a claim against a plan (fiduciary, actually), it loses. The question is not what the participant would have done, but whether or not the fiduciary acted prudently.  Are you suggesting that the claim was along the lines of "the fiduciary acted imprudently with respect to this participant because the fiduciary did not take into account (in the fiduciary's decision with respect to investing the plan assets) the individual's circumstances'?  That is the nut.  But I assert that is not an element of the standard the fiduciary would be held to.  ERISA was not designed for the current norm in 401(k) plans.  ERISA was more inclined toward pension plans.  With respect to defined contribution plans, ERISA envisioned a similar model for investing assets -- in a single fund.  404(c) was not the base, it is the exception.

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14 minutes ago, QDROphile said:

If that is a claim against a plan (fiduciary, actually), it loses.

Agreed but if you have to defend against a suit, you've effectively lost.  Of course, as noted, there are plenty of lawsuits around self-direction so it's not like that is a safe haven.  I'm not arguing with you - there is absolutely no problem with a trustee-directed plan (done right). 

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4 hours ago, QDROphile said:

If that is a claim against a plan (fiduciary, actually), it loses.

I just remember reading about the complaint.  I don't know how the case was disposed but the probability is that it was settled.

Certainly what is considered to be prudent can change over time.  I would not be 100% confident that there is no fiduciary liability associated with offering just one fund and no investment choice in a defined contribution retirement plan.  I would be more cautious when advising employers.  The main problem with judicial-made law is that it often isn't known until afterwards.

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18 hours ago, MWeddell said:

I would not be 100% confident that there is no fiduciary liability associated with offering just one fund and no investment choice in a defined contribution retirement plan.

I would be 100% confident that there is plenty of fiduciary liability associated with offering just one fund and no investment choice in a defined contribution retirement plan.

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  • 4 weeks later...

Not the case that I was trying to recall, but Toomey v DeMoulas Super Markets, Inc. is in the process of being settled.  Plaintiffs sued, claiming that fiduciaries breached ERISA's fiduciary duties by requiring all participants to invest in a single fund that earned investment returns that were too low because it was invested primarily in fixed income.

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  • 1 month later...
On ‎9‎/‎17‎/‎2020 at 4:35 PM, QDROphile said:

Can you point to any evidence that shows a fiduciary who acts responsibly and in good faith (stealing is no fair) has anything to worry about?

Here are my details.  The case of Toomey v. DeMoulas Super Markets, Inc. is a proposed class action lawsuit that is in the process of being settled for $17,500,000.  Allegedly, DeMoulas required all participants in its profit-sharing plan to invest their entire account balances in a single fund that was primarily invested in low-earning fixed income securities.  This was alleged to be a breach of ERISA's fiduciary duties.

This is an example of how there may be liability in having just one fund offered to participants of a qualified defined contribution plan so that participants do not have any control over the risk / expected return tradeoff of their investment portfolios.

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My first reaction is that this isn't a great example of "good faith" investing; too conservative.

My second reaction, after reading some details, is that the investment policy appears to have been reasonably carefully thought out and they were deliberately doing what they thought best.  Kinda sucks and if it were my company I'd say "fine, let's terminate the plan and make no more contributions."  

Still doesn't concern me and my $500K, $1M, even $10M clients.  

Thanks for posting; good info just in case we would need to point to something to shake somebody up.  I'm sure some advisors will use it as proof that self-direction is required but it really is proof that you need to be reasonable, and the bumpers on reasonable are narrower than some might think.

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Thank you for presenting this case. It is fascinating in its parallel to the scare example that Fred Reisch offered when the 404(c) regulations first came out:  unsophisticated wary participants on their own would choose the safe money market fund with almost no return over along period and therefore miss a lot of the benefit of a defined contribution plan. He suggested that 404(c) would not (should not? Fred was very sure of his opinions.) protect the fiduciaries.  He made his scare story more scary (and sexist) by having the even more unsophisticated victim widow of the unsophisticated participant be the claimant.  Apart from the irony, the overlapping point is that the “conservative“ strategy is not prudent for a retirement plan, whether exercised by a fiduciary or by disregard on the part of the fiduciary.  

I am too lazy to do the work that Bird did, and research the details and evaluate the investment policy and its formulation. From the outside perspective of an uninformed and ignorant critic, with only an inadequate summary, I would say that the fiduciary did not act in good faith in comporting with applicable standards for investment of retirement funds.  When I see a case that finds liability (not just a willingness to settle — with how much of the insurer’s funds?) for maintaining a diversified 60/40 fund (a common benchmark for performance), then I will be impressed.

 

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The court found:

 

“Plaintiff is not alleging that Defendants breached their duty of prudence by failing to provide Plan participants with a menu of investment options[.]”  Rather, the plaintiffs asserted that the plan’s fiduciaries imprudently invested the plan’s one portfolio.  Toomey v. DeMoulas Super Markets, Inc., Civil No. 19-11633-LTS [document no. 32] (D. Mass. Apr. 16, 2020) (order on defendants’ motion to dismiss).

 

The court found the facts alleged included these:

 

“Between 2013 and 2017, the Plan had approximately 11,000 to 13,000 participants with a wide range of retirement needs and objectives.  During that time, the Plan had between $580 million and $756 million in assets.   . . . .  The Plan’s Investment Policy Statement (IPS) called for 70% of the Plan’s assets to be allocated into domestic fixed income options, and 30% into equities.”

 

“[E]ven taking the investment strategy chosen by the Plan as the benchmark, it was imprudently executed in several ways.  For example, . . . Defendants often failed to meet their own equity allocation targets, in some years devoting as much as 86% to fixed income options, with the remainder (14%) to equities.  [E]ven among fixed income investments, the defendants failed to undertake appropriate efforts to generate meaningful returns.  In 2013, for example, Defendants invested 58% of the Plan’s total assets—$336 million—in cash and money market accounts earning .01% interest or less.  In 2014, Defendants increased the Plan’s investment in cash (or cash equivalents) to over $400 million, or 66% of the Plan’s assets, in accounts earning .05% interest or less.  Defendants also left millions of dollars—$27 million in 2016—in bank accounts that returned 0% interest.  [T]o the extent Defendants invested in bond funds, they failed to procure the lowest-cost share class of those funds even though, as a large institutional investor, they had the leverage to do so.”

Toomey v DeMoulas Super Markets Inc.pdf Toomey v DeMoulas Super Markets Inc complaint.pdf

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16 hours ago, Peter Gulia said:

The court found:

 

“Plaintiff is not alleging that Defendants breached their duty of prudence by failing to provide Plan participants with a menu of investment options[.]”  Rather, the plaintiffs asserted that the plan’s fiduciaries imprudently invested the plan’s one portfolio.  Toomey v. DeMoulas Super Markets, Inc., Civil No. 19-11633-LTS [document no. 32] (D. Mass. Apr. 16, 2020) (order on defendants’ motion to dismiss).

 

The court found the facts alleged included these:

 

“Between 2013 and 2017, the Plan had approximately 11,000 to 13,000 participants with a wide range of retirement needs and objectives.  During that time, the Plan had between $580 million and $756 million in assets.   . . . .  The Plan’s Investment Policy Statement (IPS) called for 70% of the Plan’s assets to be allocated into domestic fixed income options, and 30% into equities.”

 

“[E]ven taking the investment strategy chosen by the Plan as the benchmark, it was imprudently executed in several ways.  For example, . . . Defendants often failed to meet their own equity allocation targets, in some years devoting as much as 86% to fixed income options, with the remainder (14%) to equities.  [E]ven among fixed income investments, the defendants failed to undertake appropriate efforts to generate meaningful returns.  In 2013, for example, Defendants invested 58% of the Plan’s total assets—$336 million—in cash and money market accounts earning .01% interest or less.  In 2014, Defendants increased the Plan’s investment in cash (or cash equivalents) to over $400 million, or 66% of the Plan’s assets, in accounts earning .05% interest or less.  Defendants also left millions of dollars—$27 million in 2016—in bank accounts that returned 0% interest.  [T]o the extent Defendants invested in bond funds, they failed to procure the lowest-cost share class of those funds even though, as a large institutional investor, they had the leverage to do so.”

Toomey v DeMoulas Super Markets Inc.pdf 131.27 kB · 0 downloads Toomey v DeMoulas Super Markets Inc complaint.pdf 941.37 kB · 0 downloads

Thank you Peter. 

Clearly this is another case of imprudent investments (fairly common) and not following the IPS (also common), and not an issue of pooled vs participant directed accounts.  The complaint mentions (and misstates) that participants were not allowed to direct investments, but does not claim that this itself is a fiduciary breach (which would have been a summary judgment slam dunk).  Rather, they use this to set up their claim of imprudent investments and failure to follow the IPS.

On 11/24/2020 at 9:16 AM, MWeddell said:

Allegedly, DeMoulas required all participants in its profit-sharing plan to invest their entire account balances in a single fund that was primarily invested in low-earning fixed income securities.  This was alleged to be a breach of ERISA's fiduciary duties.

Incorrect.

On 11/24/2020 at 9:16 AM, MWeddell said:

This is an example of how there may be liability in having just one fund offered to participants of a qualified defined contribution plan so that participants do not have any control over the risk / expected return tradeoff of their investment portfolios.

Also incorrect.

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Thank you, Peter, for attaching both the complaint and the court's opinion denying defendants' motion to dismiss.

Complaint, paragraph 18, states:  "Participants have no choice over how their money is invested. Instead, the Plan has a “one-size-fits-all” investment strategy which every participant is tied to."  Similarly, paragraph 30 states:  "The Plan in this case offered no single asset class options nor any multi-asset class options tied to a participant’s retirement date or risk tolerance. Instead, it offered only one investment option with an investment mix determined by Defendants."

The complaint, beginning at paragraph 33, alleges that it violated ERISA because "Defendants adopted an inappropriate one-size-fits-all investment strategy for the plan."  Beginning at paragraph 38, the complaint also alleges an ERISA violation because "Defendants' investment strategy was also poorly executed."  Too much was invested in cash and the cash investments often earned zero or very low returns.  The opinion is consistent with the complaint, stating that the Plaintiff "alleges that fiduciaries of the Plan were imprudent in their consideration of (or their failure to consider) the participants’ varying interests and needs in the Plan’s allocation structure and investment choices, and that these failures were compounded by a failure to review and revise those choices over time."

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The complaint describes the essential problem by eliding a description about the absence of a provision for participant-directed investment with the assertion that the investment fiduciaries did not consider how interests differ among the participants.  (I suspect this might have been Nichols Kaster’s strategy choice.)  Neither of the complaint’s counts asserts a claim asserting that an individual-account plan’s omission of a provision for participant-directed investment is, by itself, or even as applied under the alleged facts, contrary to ERISA’s title I.  Likewise, the complaint’s prayer for relief does not seek reformation of the plan.  Judge Sorokin’s order reacts to the complaint presented and how the litigants briefed the motion about whether the complaint states a claim on which the court could grant relief.

 

That a plan’s governing document omits a provision for participant-directed investment is not itself a fiduciary’s breach because deciding the plan’s provisions is a creation or “settlor” decision, which a plan’s sponsor (rather than an administrator, trustee, or other fiduciary) may make without ERISA fiduciary responsibility.

 

Rather, a plan’s governing document (ignoring any provision ERISA’s title I precludes, and supplying any unwritten provision ERISA’s title I requires) is a part of the starting point from which a fiduciary works.

 

A fiduciary with investment responsibility must exercise its responsibility considering all relevant facts and circumstances.  Those facts could include that the plan’s participants and their beneficiaries have a wide range of ages and economic interests.

 

A fiduciary must prudently, and impartially, balance differing interests.

 

I can imagine a case in which the difficulties of balancing differing interests might overwhelm an analysis of how to invest the plan’s assets.  It might be so difficult that a fiduciary might consider whether it is impossible or impractical to obey both the governing document and ERISA § 404(a)(1)(B).

 

But the court in DeMoulas Super Markets did not reach a question of that kind.  One may read the order as logically consistent with an assumption that an absence of a provision for participant-directed investment was not invalid (or that a question had not been presented) and, following that assumption, a finding that the complaint alleged enough facts that a fact-finder could find a fiduciary breached a duty to invest prudently the plan’s one investment pool.

 

We don’t know what Judge Sorokin (or another judge) would decide if the alleged facts were about a mainstream asset allocation and nothing suggesting the fiduciary failed to consider the differing interests of younger and older participants.

 

Please don’t read the above explanations as expressing any view about whether an individual-account retirement plan should provide or omit participant-directed investment for any portion of such a plan’s assets.

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If you are considering strategy, and trying to make sense of express claims that seem incongruous (with the facts or the law) remember that the plaintiffs have to frame their claim as a fiduciary breach in order to have coverage under the fiduciary insurance policy and possibly under the corporate D&O policy.  It is quite possible the the parties were in discussion about settlement even before the complaint was filed, and both were interested in the insurance pot of money.   The prosecution of the claim may have been affected by the testing or refining of different theories to make sure the maximum amount of insurance money was available while soothing some egos. 

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On 11/27/2020 at 9:01 AM, MWeddell said:

Thank you, Peter, for attaching both the complaint and the court's opinion denying defendants' motion to dismiss.

Complaint, paragraph 18, states:  "Participants have no choice over how their money is invested. Instead, the Plan has a “one-size-fits-all” investment strategy which every participant is tied to."  Similarly, paragraph 30 states:  "The Plan in this case offered no single asset class options nor any multi-asset class options tied to a participant’s retirement date or risk tolerance. Instead, it offered only one investment option with an investment mix determined by Defendants."

The complaint, beginning at paragraph 33, alleges that it violated ERISA because "Defendants adopted an inappropriate one-size-fits-all investment strategy for the plan."  Beginning at paragraph 38, the complaint also alleges an ERISA violation because "Defendants' investment strategy was also poorly executed."  Too much was invested in cash and the cash investments often earned zero or very low returns.  The opinion is consistent with the complaint, stating that the Plaintiff "alleges that fiduciaries of the Plan were imprudent in their consideration of (or their failure to consider) the participants’ varying interests and needs in the Plan’s allocation structure and investment choices, and that these failures were compounded by a failure to review and revise those choices over time."

I think the misunderstanding has to do with how the documents are structured.  While Peter did a great job of explaining the finer points of both complaint and order, I'm going to put it in very simple terms.  

Everything in the complaint is not alleged breach of fiduciary duty.  Most of the complaint is a statement of the facts (or at least what plaintiff claims are the facts) and relevant law.  The actual alleged breaches start on page 23 of 28 (paragraph 63).  What you are reading as an "alleged breach" are just the facts of the case as presented by the plaintiff.  The "one size fits all" wording in the complaint is not trustee directed vs participant directed, it is the investment strategy of the plan (or lack thereof). 

The order to dismiss is not an opinion on what has been alleged, it is only a ruling on the motion to dismiss.  It really has nothing to do with what happened in the case, it is a ruling that the complaint itself alleges something that could be true and for which relief could be granted.  Any discussion in the order has to assume that the facts as alleged are true.  Part of the discussion in the order goes as far as to say

Quote

As the Court understands it, Plaintiff is not alleging that Defendants breached their duty of prudence by failing to provide Plan participants with a menu of investment options, though that might be a relevant factor in analyzing the prudence of Defendants’ decisions when they were made

 

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What RatherBeGolfing said.  (RBG, thank you for explaining a point I didn’t describe.)

 

Also, a judge’s finding that a complaint alleges enough facts to support a claim on which the court could grant relief does not tell a reader that every alleged fact is relevant; rather, it finds only that the complaint includes allegations needed to support the claim the judge finds is sufficiently asserted.

 

The most Judge Sorokin observes about how the plan’s omission of participant-directed investment relates to the asserted fiduciary breach is that participants’ potentially differing interests might have been something the fiduciaries ought to have considered in deciding investments for the one portfolio that commonly affected all participants’ accounts.  And that observation is not needed to support the finding that the complaint asserted a fiduciary breach.

 

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9 minutes ago, Peter Gulia said:

Also, a judge’s finding that a complaint alleges enough facts to support a claim on which the court could grant relief does not tell a reader that every alleged fact is relevant; rather, it finds only that the complaint includes allegations needed to support the claim the judge finds is sufficiently asserted.

Ah, the fun one can have with the Federal Rules of Civil Procedure...

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I have a law degree.  I am quite familiar with the fact that a court on a motion to dismiss is ruling whether the allegations are sufficient, not on whether the underlying facts are true. 

My post from last Friday consisted almost entirely of quotes from the two documents that Peter provided to lessen the possibility of any "misunderstanding" or that I was "incorrect."

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