SPD Language for Participants' OptionTo Avail of Fiduciaries' Management of Their Accounts Using Professional Managers

[Guest Roman]

A recent article stated that "the summary plan description should have a clear statement that, if participants are concerned that they do not know how to invest properly,or if they simply do not want to take on that responsibility, the fiduciaries will manage their accounts. If participants communicate that they would rather have their accounts managed, in most cases the best choice would be to provide professionally managed accounts through an investment advisory firm. A number of advisory firms are offering those services. As a second choice, fiduciaries could use aged-based (or "target") lifestyle funds (for example, a 2010 fund, 2020 fund, a 2030 fund, and so on, where the date on the fund roughly corresponds to the participant's anticipated retirement age under the plan). The third choice might be a moderate risk-based lifestyle fund or a balanced fund."

We need to add this to a Volume Submitter SPD. Does anyone have some SPD language covering this?

[mbozek]

Why would a fiduciary want to take on the risk of a lawsuit for poor investment results for managing a participants account under a plan which permits the participants to direct investments? Second, who will pay for the investment advisory services and how will the fids review the performance of the advisors? Will participants who select this option be informed of the costs? Why not just make lifestyle funds available to those participants who do not want to manage their own accounts without having the fids take the risk of managing their accounts?

[Demosthenes]

Why not have Reish Luftman Reicher & Cohen (the authors) write it?

Whenever I read articles like this from law firms or investment advisors, I take them with a grain of salt.

Not to be cynical but fear generates fees

[QDROphile]

A summary plan description describes what the plan does. How can someone give you some language for the document if they don't know what the plan does? The article that you describe covers some ideas. Some of the ideas might be implemented after considerable thought and advice. I cannot imagine that the plan will have all of the options mentioned in the article. Once the plan fiduciary decides what the plan will do, a description is prepared, and will cover other matters, such as identity of the advisers, how fees are covered and how to make elections.

[austin3515]

http://www.reish.com/publications/article_...m?ARTICLEID=475

Frankly, I like the idea. I've always believed that people, who may well be experts at whatever it is they "do", more often than not are bad investors. I have a public accounting background, I took finance classes in college, and I still am a very poor investor (although due more to a lack of diligence on my part than anything else). What chance does a factory worker for whom English is a second language have at navigating the Wall Street Journal? Is it prudent to require them to navigate on their own? I don't think so.

If I was a fiduciary, as Reish recommends, I would default everyone automatically to the life style fund corresponding to their retirement date (don't even give them the chance on the enrollment form). If they want to change later, that's their perogrative but I bet most will stay put (as does Reish). Maybe don't even give them the option to shift out. This is an improvement from 10 or 15 years ago when all the funds were pooled and invested with one set of objectives-at least with a lifestyle fund, the objectives are specific to your age, which should be the most important factor. I can't think of a solution that meets the practical and prudent objectives as handily as lifestyle funds. As the article suggests, no one complies fully with 404© (the requirements are extensive and extremely costly), so alternate solutions are advisable.

I once read that all of the class action lawsuit lawyers who won billions on the tobacco settlements are gearing up for their next bigg initiative - helping "disenfranchised" baby-boomers get their due from "careless and imprudent" fiduciaries. Quotations denote my guess at the language they'll be using.

I'd be scared stiff about this if I was the fiduciary of a self directed plan where the participants were not savvy investors. Better make sure you have a good fiduciary policy!

[mbozek]

Austin: What fid wants to take on the liability risk of determining each participant's retirement date since no one know when they will retire? Also why does a fid want to be liable for the inevitable mistakes which will result when some participants are put in the wrong lifestyle fund? Like any other investments there are good and bad lifestyle funds. Despite what you may read there is very little interest by the litigation bar in suing plan fids under ERISA because there are no punative, compensatory or consequential damages payable which is what makes litigation so rewarding. (Also no jury trials.)

If a fid of a 404c plan is so worried about participants suing under ERISA there are two cheap options: adopt a SEP or simple plan which use IRAs or adopt a directed brokerage option where the participants can make any investment choice and for which there is no fidiciary liability for participant investment decisions.

[austin3515]

I'm not sure whether participant directed brokerages exonerate you from fiduciary liaibility. I think it makes it worse?

If 99.9% of people get put into the fund corresponding with their retirement date under the Plan (i.e., age 65) they're still better off than 50% of the participants investing in the money market fund for 30 years (an extreme example of course, but I've certainly seen plans very highly leveraged into the money markets).

I'm just against participant-direction of investments in most cases. I think it's asking too much of participants, and I think a lot participants would agree.

Alhough there are no punitive damages, you're market is every baby boomer. So what you lack in margin, you make up for in volume... But your argument does bring me some comfort, and I hadn't considered it.

As far as I can tell there are no good answers to this!