More liability for removing than "freezing" a poor-performing fund?

[ERISAatty]

A particular client has a 401(k) plan investment committee and is convinced that, if the plan investment committee identifies a particular fund as poor-performing, they should "freeze" that fund, and not let any "new money" into it. However, they think that this is a *safer* fiduciary bet than *removing* a fund that they have identified as poor-performing.

I take the opposite view. If, by their own process and investment policy statement, they've i.d. a fund as poor, but they then allow participants to stay in it, that strikes me as increasing their risk for participant claims if the thing tanks. There is written proof that they knew it wasn't performing! (I've seen the use of a hold and review list as standard - and if the fund stays down for a long enough time, it is removed).

Not much success reasoning with them on this point so far. (They believe - and there's something to this - that if they document their freeze process, and follow it, then the investment results don't matter). They are convinced (and I strongly disagree here) that in removing a fund, they face much higher risk than in just freezing it.

Any thoughts, examples, or insights from those of you who follow the participant fiduciary cases?

Thanks.

[david rigby]

...but they then allow participants to stay in it, that strikes me as increasing their risk for participant claims if the thing tanks.

Non-attorney comment: this implies you think the PA must get all monies out of that fund. I think that's overly demanding (some might use the term "controlling").

Suppose the ER says to the participants, "Fund X has not performed well, so we've added Fund Y and frozen X. If you want to move your current fund X allocation, you may do so."

[Bird]

This is not totally responsive to your question, but I think these performance reviews are 99% nonsense. They always start by looking at past performance, and what's the first thing you see when you start looking at mutual funds: "past performance is not an indication of future results." That goes both ways; prior good performance is no guarantee of future good performance and prior bad performance is no guarantee of future bad performance. Now if you're talking about dropping a fund due to high expenses or something going on with the management team, then that's a bit of a different story, but I've seen enough of these reviews to know they're pretty much looking at performance.

To your question, I wouldn't remove a fund entirely unless there were restrictions on the number of funds allowed and keeping it frozen prevented me from adding the one I wanted. Think about it - if you force someone into a fund not of their own choosing, and then it goes down or otherwise performs worse than the one of their original choosing, they've suffered a loss due to your actions. Whether that is actionable or not I don't know but it certainly sounds bad. (non-lawyer perspective)

[QDROphile]

If the fiduciary has determined that the fund is no longer a reasonable investment option, the option should be removed. If a new fund is necessary to provide a reasonable menu, then a new fund should be added. Halfway measures are generally not a good idea. The compromise undercuts the fiduciary's decision and suggests that the fiduciary did not do a proper job.