Fiduciary Liability question

[FJR]

I am sure this has come up before, but here it goes again.

Who has more liability as a trustee. A plan that does not allow for participant self-direction, i.e. a pooled investment that hires a money manager, has a written investment policy, makes decisions quarterly with investment manager. Or, a participant self-directed plan where the participants choose among 12-15 funds. Again, from a trustee standpoint, which scenario carries more liability? Thanks

[pmacduff]

There isn't a simple answer to your question. There have been other discussions on these boards as to how easy or hard it is to comply with 404© to reduce your fiduciary liability with respect to allowing participant direction. You may want to look around at those. I don't think you can say that a Trustee of one or the other types of investments (directed or pooled) has more or less liability with so very many factors involved. Just my opinion, anyone else out there?

[QDROphile]

Whatever the answer to the question, the answer should have little or no bearing on the decision about which system to use for investment of plan assets.

[Jon Chambers]

I'd suggest that a plan that has a prudently developed investment policy that is actually followed, and an investment monitoring and review process in general holds less liability for the trustee than a plan with an ad hoc set of mutual funds that participants use in a self-directed environment.

Remember that the trustee directed structure creates an investment portfolio that is reasonable overall, but probably not optimal for any single plan participant, because the portfolio is managed for the "average" participant, and the average participant doesn't exist. Balance that against the protection afforded under 404©, and the ambiguities in the question become obvious.

I'm not sure that your question is an either/or scenario. I'd suggest that trustees bear the least liability under a combination of both approaches--participant self-direction among designated mutual funds, IPS setting standards for selection and review of mutual funds, and periodic monitoring.

[Erik Read]

Jon hit the nail on the head - IMHO - a self-directed plan, with an "investment committee", set Investment Policy, monitoring reports (on a regular basis) committee minutes showing discussion of fund options and their performance as benchmarked in the Investment Policy and a diverse set of investment options - that's probably the best of both/all worlds and one of the ways to help ensure compliance with 404©.

On the otherhand, I cannot see a court of jury holding a fiduciary liable in the trustee directed plan, as long as they follow the same guidlines.

So the answer to your SPECIFIC question would be less liability in example one - trustee directed, only because you do not mention an investment policy or monitoring in example two.

Great question.