Percentage of trustee/participant directed 401k plans

Would anyone have a reference to the relative percentages of trustee vs. participant directed 401k plans.

Short of that, anybody want to hazard a ballpark estimate.

Knowing no real facts on the subject, to get the ball rolling I would guess something like 80% participant directed 20% trustee directed.  Why would any sane trustee want the entire fiduciary burden of making investment decisions to rest on his or her shoulders?  It is, after all, 2017, not 1995!

For Form 5500, codes 2G and 2H refer to whether an individual-account plan has participant-directed investment, in whole or in part.  Code 2F refers to whether a fiduciary intends to meet conditions that would allow an ERISA § 404(c) defense against a fiduciary-breach claim.

spiritrider, if you or your client wants the breakdown between participant-directed and not, consider asking a data collector (perhaps one that advertises on BenefitsLink) what fee it would charge for pulling the Form 5500 data on your question.

The DOL actually publishes statistics based on Form 5500 data.

Go to https://www.dol.gov/agencies/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan

The most recent statistics were published in September of 2016 and uses the 2014 data so it is slightly dated but it takes time to compile and put together the report.

Look on page 49 of the report (pdf page 53) and it will give you the stats for participant direction

Looks as though more than 60% of the plans over 1,000 participants are entirely participant-directed with another handful partially participant-directed.  Below 1,000 tends more toward non-participant-directed.

Is anyone surprised that these percentages are so low?  I find it very surprising. 

That seems very low

Note this isn't just 401(k) plans this is all DC plans.  So this would include ESOPs which almost never have anything other then trustee directed.  There  are a few KSOPs and a very rare ESOP that allows for participant direction of their diversification accounts inside an ESOP. 

Going back to my days when I did balance forward DC plans and ESOP (2009 was the last year) my experience is very few 401(k)s don't allow some kind of direction.  Even the balance forward PSP and 4ks we had still allowed quarterly or monthly changes. 

Primary reason we had any PSPs or 4k plans that were balance forward was becasue the sponsor wanted something about that plan's running the large plateforms wouldn't give them.  They had favored investment advisors or some servce our practice was willing to give them if they paid us for the service.  We weren't the cheapest TPA by a long shot but we pretty much gave you what you wanted. 

For example:

We had a client that had favored investment advisors.  They wanted us to give them monthly reconciliation and earnings allocations that included specific guidelines on the ROI for the advisors within days of the statements coming out.  If the advisors missed the agreed upon ROI benchmark too many times they were replaced.  On the annual statements it included a life to date break down of the companies PSP contributions by year.  For some people it went back to the late '60s.  This had a total so the person could see how much of their account was company money vs earnings.  They put in a near maximum PS contribution every year for their people.  They paid us great money for those services and were happy as can be. 

For example:

I *HAVE* a client that takes a very paternal approach to all things benefit related.  They have less than 20 eployees and I can count on one hand the pre-retirement terminees in the last 10 years.  The company has been around for over 40 years and the plan for over 35. They started out, as you would imagine, with balance forward because what else was there, other than big hair, in the early 80's? They engaged a classic investment management firm that publishes quarterly "state of the world" investment philosphy newsletters and issues quarterly statements to the Trustee with everything one would expect of a professional investment management firm.  The client is a family run business and the founder's progeny have steered the company as well and as profitably as the prior, now long since retired, generation did.  The average account balance for the non-owners is north of 1/4 million. The company distills the information received from the investment advisors quarterly and lets the employees know how things are going (in good times and bad... 2008 is a distant [and bad] memory).  The company benchmarks fees no less frequently than every three years and has long since reduced administrative fees to less than 10 basis points (I kid you not). The investment management firm meets frequently with the Trustees.  Every once in a while somebody mentions the potential advantages of participant direction but the employees will have none of it.  The company certainly doesn't need a participant directed qualified plan to attract talent, it does so quite well without it.  The Trustees (who are also the owners of the company) feel that they are addressing their fiduciary responsibilities professionally and responsibly and that they owe their employees every bit of effort they put into comunicating and running the plan.  In short, I think that balance forward plans are most successful when there is long term stability - and that doesn't happen very often any more so the market has turned somewhat of a deaf ear to such client's needs.  Did I mention this is a 401(k)?  And that it would pass the ADP test each year with plenty of room to spare (even though the design is, as you would guess, a safe-harbor).

I think the real losers in participant directed plans are the participants. And I think this has come about because the true professionals in the investment management world have found it more profitable to attract non-ERISA monies and have abandoned ERISA plans for the most part.

But I, too, am surprised at the statistics because I would expect plans that do not offer participant direction to be, at most, in the single digits.

I have a lot of 401(k) plans that are trustee directed.  Most of them are 20 participants or less, and all of the non-owner participants have done much better than non-owner participants in my other plans that are participant directed.  Another interesting characteristic of these plans (at least my plans) is that they have very little leakage because the plan sponsor wants to make sure that his/her employees actually have assets left when they retire.  Very few of them offer loans, hardships, or in-service distributions.  

3 hours ago, RatherBeGolfing said:

The DOL actually publishes statistics based on Form 5500 data.

Thanks, this is helpful.

6 hours ago, My 2 cents said:

Knowing no real facts on the subject, to get the ball rolling I would guess something like 80% participant directed 20% trustee directed.  Why would any sane trustee want the entire fiduciary burden of making investment decisions to rest on his or her shoulders?  It is, after all, 2017, not 1995!

Based on the link to the DOL statistics, the percentage where the participants direct all investments for the 250-499 range of this plan, is ~90%.

The board members and overwhelming sentiment of the employees that they want a new participant directed plan. It is the CEO who is the source of all the objections. He claims that the company would have to provide hours of training annually and this would make the board members liable. The word is that he is very tight with the investment advisors and thy are probably providing him with the objections. They have a lot of money (six figures/year) to lose.

47 minutes ago, Mike Preston said:

...

I think the real losers in participant directed plans are the participants.

I appreciate your perspective and there isn't much to disagree with, especially the above sentence. Participants can be their owned worst enemy.

The eight figure plan assets are invested entirely in individual stocks. The advisors have actually tracked their benchmarks pretty well. Trailing by less that 1%/year before expenses, but the plan administrative/recordkeeping cost are more like an additional 50 basis points.

3 hours ago, My 2 cents said:

Looks as though more than 60% of the plans over 1,000 participants are entirely participant-directed with another handful partially participant-directed.  Below 1,000 tends more toward non-participant-directed.

3 hours ago, jpod said:

Is anyone surprised that these percentages are so low?  I find it very surprising. 

3 hours ago, TPAJake said:

That seems very low

1 hour ago, Mike Preston said:

But I, too, am surprised at the statistics because I would expect plans that do not offer participant direction to be, at most, in the single digits.

If you go to page 51, it uses 401(k) type plans rather than all DC plans.  The percentages here are probably more in line with what is expected

8.7% (46,696 / 533,769) are trustee directed

2.7% (14,403 / 533,769) offer limited participant direction (probably on the 401(k) portion)

88.6% (472,669 / 533,769) are participant directed

79% of the  trustee directed 401(k) plans have less than 25 participant

15 hours ago, spiritrider said:

Thanks, this is helpful.

Based on the link to the DOL statistics, the percentage where the participants direct all investments for the 250-499 range of this plan, is ~90%.

The board members and overwhelming sentiment of the employees that they want a new participant directed plan. It is the CEO who is the source of all the objections. He claims that the company would have to provide hours of training annually and this would make the board members liable. The word is that he is very tight with the investment advisors and thy are probably providing him with the objections. They have a lot of money (six figures/year) to lose.

I appreciate your perspective and there isn't much to disagree with, especially the above sentence. Participants can be their owned worst enemy.

The eight figure plan assets are invested entirely in individual stocks. The advisors have actually tracked their benchmarks pretty well. Trailing by less that 1%/year before expenses, but the plan administrative/recordkeeping cost are more like an additional 50 basis points.

 

Commenting on the 2nd paragraph above - wouldn't having the sponsor making all the investment decisions concerning the 401(k) assets be much riskier, from a fiduciary responsibility standpoint, than allowing the participants to direct the investments?  And please, don't get me started on the possible violations involved when the CEO and the investment advisors are "very tight" and the investment advisors are pulling in six-figure fees!

Commenting on the last paragraph above - all individual stocks, eh?  How much does that cost as a percentage of the invested assets?  Wait until the lawyers suing all those colleges hear about this one!

22 minutes ago, My 2 cents said:

Commenting on the 2nd paragraph above - wouldn't having the sponsor making all the investment decisions concerning the 401(k) assets be much riskier, from a fiduciary responsibility standpoint, than allowing the participants to direct the investments?  

Not really.  Participant direction comes with a minefield of requirements and disclosures.  Participant directed plans are an easy target for Schlichter and company because you can almost always find plausible issues with fund lineups, fund choices, share classes, disclosures that you need a PhD to navigate, failures to disclose , etc.

There is risk involved with trustee direction as well, but I actually think you have more risk in a participant directed plan.

I would agree you have more operational risks in a Participant directed plan, but a Trustee directed plan seems like a ripe target on investment risks.  Self-dealing & excessive fee suits are a lot more common in the news that failure to distribute/disclose.   

1 hour ago, TPAJake said:

I would agree you have more operational risks in a Participant directed plan, but a Trustee directed plan seems like a ripe target on investment risks.  Self-dealing & excessive fee suits are a lot more common in the news that failure to distribute/disclose.   

Why the assumption that self-dealing & excessive fees is a trustee directed plan issue?

Often, those types of claims arise because the investment options provided to the participants are proprietary funds with higher fees than other available alternatives.  Or that a fund menu is stacked with share classes paying higher fees or revenue sharing rather than low cost or no revenue sharing funds.  

The plans targeted tend to be large plans with many participants, and they are statistically unlikely to be trustee directed...

All other things being equal, using an investment advisor who is tight with the CEO and who, for six figures per year, invests exclusively in individual stock shares, does not usually result in reasonable expense charges, even if one is lucky enough to get presentable rates of return almost as good as index funds.

3 hours ago, RatherBeGolfing said:

There is risk involved with trustee direction as well, but I actually think you have more risk in a participant directed plan.

Amen!

2 hours ago, RatherBeGolfing said:

Why the assumption that self-dealing & excessive fees is a trustee directed plan issue?

Often, those types of claims arise because the investment options provided to the participants are proprietary funds with higher fees than other available alternatives.  Or that a fund menu is stacked with share classes paying higher fees or revenue sharing rather than low cost or no revenue sharing funds.  

The plans targeted tend to be large plans with many participants, and they are statistically unlikely to be trustee directed...

I don't assume those are issues common to Trustee directed plans, quite the opposite usually, but if a case is presented, it seems like it would be difficult to defend the Trustee's investment selection in the face of losses--Luckily I have no personal experience with that!

It struck me in this case as the CEO keeping his buddies (or personal asset managers) on the Plan to gain some benefit on the personal side.  Not the traditional self-dealing scenario, but the name fits.  

As far as excessive fees, if they're running individual stocks & collecting six figures annually they better be topping the market by a large margin.  If their returns are comparable to other plans in their peer group, then a lot of questions start to arise about how appropriate this fee arrangement can be.  Sometimes perception is reality...

All that aside, I do think that more Plans should be Trustee directed because Participants are not known to be the smartest investors.  

I don't see the monsters under the bed that others are seeing.  Assuming the investment advisors have a long term and successful track record, the fact that the CEO has gotten to know them well is what I would expect.  How could it be any other way?  Different managers have different methodologies and just because investments are primarily equity based doesn't mean that they don't employ sophisticated portfolio risk aversion techniques.  I just don't see the problem with the CEO holding his ground.

The relationship between the CEO and advisor isn't prima facie evidence of a problem.   It could be a red flag. 

To become a problem there would have to be something else happening. 

For example decisions have to be for the exclusive benefit of the participants.  Back in the '90s I recall a number of banks made as a condition for the plan sponsor to get the loans the company needed they had to move 100% of their business to the bank.  So the bank got the company's checking account and since more banks did 401(k) work in their trust departments the 401(k) had to be moved.  Even if you could show the costs were about the same this raised exclusive benefit rules questions. 

In the end if the investment advisor is helping the company get funding or some other service besides the 401(k) plan and there is some other conditions upon this whole relationship then it would become a problem. 

I fail to understand why a company would want to take on the liability of having to answer to, or justify a "one-size fits all" asset allocation solution, regardless of the participant's age, risk tolerance, etc...as an option.  Allowing for participant direction seems to eliminate the venom more completely. Just in the same way that when I exchange my time and labor for an employer's wages, the employer's money then becomes "my" money.  The same is true as soon as an employer's contributions to a retirement plan become vested and owned by the participant... and realistically, even beforehand.  Why would a trustee/fiduciary knowingly take on the liability to have to potentially justify the fact that their 24 year olds were invested in the same manner as their 60 year olds?  Why take on the risk of having to answer to or justify their actions (or lack thereof), when allowing for participant direction seems to render this more of a moot point?  I've often heard from employers on these pooled and trustee directed plans, things like...."Well, you see...my employees don't"....Insert excuse here...."Know about investing"..."understand retirement plans"..."understand the market"...blah, blah, blah... Perhaps this is a scenario where possible good intentions were not fully thought through in light or risk assumed?  Was the advice to keep the status quo fully informed or perhaps potentially conflicted by those who would seek to protect their revenue? Let's hope that the employer's good intention approach prevailed in wanting to better support their employee's ability to succeed in retirement...If it was in fact a "lack of education" concern cited, then perhaps they should evaluate their expectations and needs for the level(s) of employee support provided as a component of how their plan is served and supported.  Crazy thought here, but perhaps they could hire an advisor or provider to address those "specific" concerns addressing "support".  Those same "my employees..." excuses justifying the one-size fits all approach to managing other's retirement assets, won't likely hold up in court if called to do so.  If called, best for them to have tons and tons of documentation on their decision making processes as a trustee/fiduciary (anyone with decision making authority) responsible and accountable for controlling other's vested assets.  In the trustee directed and or pooled asset plan scenario, plan sponsors need to realize that it's not the advisor's plan, assets, fiduciary duty or liability on the line.  Plan sponsors are liable for their decision making process on employees owned plan assets (vested or not) and are responsible (and perhaps personally liable) to answer to and perhaps defend what was, or was not done at any given point in time relative to any specific participant's best interest.

1 hour ago, Who's money is it? said:

I fail to understand why a company would want to take on the liability of having to answer to, or justify a "one-size fits all" asset allocation solution, regardless of the participant's age, risk tolerance, etc...as an option.  Allowing for participant direction seems to eliminate the venom more completely. Just in the same way that when I exchange my time and labor for an employer's wages, the employer's money then becomes "my" money.  The same is true as soon as an employer's contributions to a retirement plan become vested and owned by the participant... and realistically, even beforehand.  Why would a trustee/fiduciary knowingly take on the liability to have to potentially justify the fact that their 24 year olds were invested in the same manner as their 60 year olds?  Why take on the risk of having to answer to or justify their actions (or lack thereof), when allowing for participant direction seems to render this more of a moot point?  I've often heard from employers on these pooled and trustee directed plans, things like...."Well, you see...my employees don't"....Insert excuse here...."Know about investing"..."understand retirement plans"..."understand the market"...blah, blah, blah... Perhaps this is a scenario where possible good intentions were not fully thought through in light or risk assumed?  Was the advice to keep the status quo fully informed or perhaps potentially conflicted by those who would seek to protect their revenue? Let's hope that the employer's good intention approach prevailed in wanting to better support their employee's ability to succeed in retirement...If it was in fact a "lack of education" concern cited, then perhaps they should evaluate their expectations and needs for the level(s) of employee support provided as a component of how their plan is served and supported.  Crazy thought here, but perhaps they could hire an advisor or provider to address those "specific" concerns addressing "support".  Those same "my employees..." excuses justifying the one-size fits all approach to managing other's retirement assets, won't likely hold up in court if called to do so.  If called, best for them to have tons and tons of documentation on their decision making processes as a trustee/fiduciary (anyone with decision making authority) responsible and accountable for controlling other's vested assets.  In the trustee directed and or pooled asset plan scenario, plan sponsors need to realize that it's not the advisor's plan, assets, fiduciary duty or liability on the line.  Plan sponsors are liable for their decision making process on employees owned plan assets (vested or not) and are responsible (and perhaps personally liable) to answer to and perhaps defend what was, or was not done at any given point in time relative to any specific participant's best interest.

Me thinks you are suffering from tunnel vision. I'd love to put you and @LarryStarr in a small room and see who walks out.

10 hours ago, Who's money is it? said:

Those same "my employees..." excuses justifying the one-size fits all approach to managing other's retirement assets, won't likely hold up in court if called to do so.

Wait, you think a pooled plan that is properly diversified would have problems in court because it is pooled??

10 hours ago, Who's money is it? said:

Why take on the risk of having to answer to or justify their actions (or lack thereof), when allowing for participant direction seems to render this more of a moot point? 

Yep, participant direction takes away all the risk...

Im just gonna leave this here...

When the 404(c) regulations finally came out long ago, Fred Reish came out and warned that, notwithstanding 404(c), he saw risk of liability in throwing unsophisticated participants to the dogs.  Fred loved being out on the forefront, and being a contrarian assured attention, but I am totally with him in spirit -- it is irresponsible to force unsophisiticated persons into a responsibility that ERISA requires of (essentially) a professional, with respect to one of the greatest sources of wealth they will ever have.  Employers have an interest in good performance so their employees have enough money to retire, rather than hang on too long (yes, a career is an antiquated notion).  After the regs came all the handwringing and complexity and Illusion of providing adequate investment information (but not required education) to deal with the realization that many participants did not want, or even feared, the responsibility of managing money, and were paralyzed.  Skip forward more years and know we have target-date funds and lifestyle funds and all sorts of things that essentially come back full circle with products that a participant effectively just chooses a money manager for them, and with very uncertain understanding of what they are doing.  And add features, if you will, that provides investment advice (either mechanically or personally) to participants, that is not free.  Experience has shown the weakness of the 404(c) approach.  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?  Yeah, yeah, the young bucks will always complain about the old man's plan.  I am immune to that while conceding it is a valid point, but not as sharp as the young bucks think.

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.

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.

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). 

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.

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.

Yes, but not what most people think.

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.

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.

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.

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.

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

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.

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."

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.

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. 

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

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.

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...

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."