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The Fiduciary Process is Only As Good As the Questions You Ask

By Jeb Graham, CEBS, CIMA® Accredited Investment Fiduciary®, of CapTrust Financial Advisors, an independent consulting/advisory practice focused on the institutional retirement plan market, serving corporate, closely held, non-profit and governmental organizations. You may contact Jeb at 813.218.5008 or jeb.graham@captrustadv.com.


In the ongoing saga of fiduciary lawsuits, it appears the plaintiffs finally scored a win, albeit small. This court case, Tibble v. Edison International, decided earlier this summer may have interesting ramifications for our industry with regard to accepted standards of fiduciary oversight. Unlike most of the revenue sharing/excessive fee cases filed in the past few years, this one was, at least partially, decided in the plaintiffs' favor.

The case involved a large plan in Southern California and was filed in the U.S. District Court for the Central District of California. The plaintiffs alleged a number of fiduciary violations: collection of revenue sharing to offset recordkeeping fees paid; having a money market fund instead of a stable value fund; including sector funds on the menu; allowing trustee fees to be paid from float; and unitizing the employer stock fund. As in similar cases, these claims were all dismissed.

The Court did not find the plan fiduciaries to have put interests of the plan sponsor above those of plan participants. It concluded, in instances where funds were replaced, there was no pattern of a motive to increase revenue sharing. What is different in this case is one charge stuck. The Court held that plan fiduciaries violated their duty of prudence by choosing to invest in the retail share class rather than the institutional share class of three mutual funds. So, how was this decision reached?

On the surface, the fiduciary oversight structure of this plan sponsor would have seemed to be more than adequate to insulate plan fiduciaries against potential breaches. The oversight process was thorough and well-documented. The investment committee was separate from the benefits administration functions. The committee used an "independent" investment consulting firm to review, select and monitor the investments. All revenue sharing was accounted for.

What went wrong for the defendants?

Maybe they didn't ask the right questions, part one. ERISA requires plan fiduciaries to ensure fees are reasonable for services provided. In this case, all the revenue sharing was accounted for, but was there a link between the revenue sharing collected and what constitutes reasonable fees? Was the recordkeeper ever asked to state the cost of services? Or were the revenue sharing payments simply assumed to equal the cost of services?

In my experience with fee analysis work, the service provider's stated cost of service is often the missing link. Without this vital number, the most detailed reconciliation of revenue sharing payments means very little. In my opinion, this is significant in this case because, had the committee documented their cost of recordkeeping services as being comparable within the industry and stated the intent to pay such fees from plan assets, the outcome might have been different. If in fact, the institutional share class did not generate enough revenue to cover the cost of services, an argument could be made for using the retail share class. I believe this was an important factor in the Wal-Mart case being dismissed.

Maybe they didn't ask the right questions, part two. Although there were minimum investment thresholds to gain access to institutional share classes, the court concluded the committee never even asked for any waiver of such minimums. The fact that the plan had more than $2 billion in assets and expert testimony suggested much smaller plans were typically granted waivers was likely a big thorn in the side of the defendants. Maybe their mothers told them it was not polite to talk about money.

Maybe they didn't ask the right questions, part three. By all appearances, the committee was sophisticated, well-structured and followed commonly accepted fiduciary process. They engaged the services of a well-recognized name as investment consultant. So, where was the investment consultant in the fee analysis and reconciliation? Did anyone question that the investment consultant was a subsidiary of the recordkeeper? Might this have impacted their analysis of fees?

Yes, this verdict is different, perhaps unexpected, and maybe a little unsettling for plan fiduciaries. Maybe fiduciary process is not the defense we in the industry have cranked it up to be. But then again, maybe fiduciary process is only as good as the questions you ask.

This material is distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. The views contained herein are the opinions of the author. It is not intended as legal or tax advice.

CapTrust Advisors, LLC is a Registered Investment Advisor with the SEC. CapTrust is not a legal or tax advisor.


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