Must a retirement plan’s fiduciary analyze competing rollover-IRA products?

[Peter Gulia]

Consider this situation (hypothetical, but I hope grounded in enough reality to be useful for our BenefitsLink conversation).

 

An employment-based retirement plan’s fiduciary seeks a rollover-IRA for default rollovers.

 

The fiduciary receives three offers.  Each offer presents a form of agreement closely based on 29 C.F.R. § 2550.404a-2(c)(3), including contract promises and warranties on all five conditions.  Every offer represents and warrants that the IRA’s and its investments’ fees and expenses don’t and won’t “exceed the fees and expenses charged by the individual retirement plan provider for comparable individual retirement plans established for reasons other than the receipt of a rollover[.]”

 

Yet these offers differ not only in their illustrations of the capital-preservation investment’s past performance (which anyhow might not predict future performance) but also in the current fees and expenses.

 

If the fiduciary does no analysis, chooses one offer, and over the years it turns out to have had the highest fees and expenses and the worst investment performance, is the fiduciary nonetheless protected by the rule’s safe harbor?

 

(Assume full disclosures, and that neither the selection of the IRA nor investing a rollover into it results in a nonexempt prohibited transaction.)

 

If the fiduciary has some responsibility beyond what the safe harbor deems “satisfied”, what is that responsibility?

[RatherBeGolfing]

The point of the safe harbor is that the fiduciary is deemed to have satisfied his/her duties with respect to the selection of the provider.  You present an interesting hypo, but as long as the safe harbor is met, the analysis is complete.  If I take bids from 5 companies and pick the first one that meets the safe harbor standard, I have fulfilled my obligation. The fact that there was a better performing or less expensive option is irrelevant. 

[jpod]

I guess it remains to be see whether a court would defer to the DOL's safe harbor in a private cause of action where the facts are very bad (as FGC posits).  Probably, however, we will never see such a case because the plan sponsors who are large enough to be a target for the class action bar probably do undertake the type of due diligence FGC describes, and in fact probably get the IRA fees down to almost zero.

[RatherBeGolfing]

6 minutes ago, jpod said:

I guess it remains to be see whether a court would defer to the DOL's safe harbor in a private cause of action where the facts are very bad (as FGC posits).  Probably, however, we will never see such a case because the plan sponsors who are large enough to be a target for the class action bar probably do undertake the type of due diligence FGC describes, and in fact probably get the IRA fees down to almost zero.

We only know that the provider had the highest fees and worst performance of the three providers in the hypo.  That alone does not make the provider a bad or very bad choice, just different.

As with anything else in this business, there is no requirement that we use the cheapest or best performing provider.

 

[My 2 cents]

Interesting question.  Do fiduciary standards apply when the default IRA provider is selected?  [Insert usual caveat that I am not a lawyer, etc.]

1.   Even if they did, who is going to sue if the total amount put into the IRA prior to any fees is certainly less than $5,000?  The complaint would be that when the person whose benefits were rolled over to the IRA went to collect it, instead of $3,800 under a carefully chosen default provider's IRA, there was only $1,800 (due to fees and poor investment performance), the difference being the result (at least in part) of a fiduciary failure in choosing the provider.  Is it a defense to such a suit to point out that it was essentially the participant's fault that a default rollover had to be made in the first place?  How often would there be enough default rollovers to lead to the possibility of a class action?  Nearly all instances would be individual suits.

2.  Even if there were some degree of negligence in choosing among potential default IRA providers, once the money is transferred to the default provider, the person whose money is transferred ceases to be a plan participant, and it is an absolute certainty (the sponsor and the default provider being unrelated) that the sponsor is absolved of any need to pay any further attention to that person.  Unlike the selection of investments, once the default provider is selected, it is unlikely that a credible argument could be made that the sponsor has an ongoing duty to monitor the performance of the selected IRA provider.

[Peter Gulia]

RatherBeGolding, jpod, and My 2 cents, thank you for helping me sharpen my thinking.

[RatherBeGolfing]

1 hour ago, Fiduciary Guidance Counsel said:

RatherBeGolding, jpod, and My 2 cents, thank you for helping me sharpen my thinking.

Always happy to participate.  Hypos and thinking outside the box keeps us on our toes.