Questioning 401k Lawsuits Based on Investment Outcomes

By Neal Shikes, CRPC®

Investment results are outcomes. No one can predict the excess return relative to a benchmark (Alpha) that is usually associated with active investment management. Then it should come as no surprise that no one can predict the market as a whole (beta). Choosing investments is a subjective endeavor.

So why are so many legal actions and allegations against Employer Retirement Plans Sponsored Plans based on subjective endeavors with unknown outcomes? Even via an appeal, the judge will allow the journey to the door but, without the keys, will never allow the door to be opened.

Loyalty and prudence is demonstrated in the behavior and methodology of the fiduciary and judges have no compunction in stating this:

"However, a plan fiduciary's actions should "not be judged 'from the vantage point of hindsight.'" Chao v. Merino, 452 F.3d 174 , 182 (2d Cir. 2006) (quoting Katsaros v. Cody, 744 F.2d 270 , 279 (2d Cir. 1084). Cf. Pension Benefit, 712 F.3d at 716 (noting that the "prudent person" standard "focus[es] on a fiduciary's conduct in arriving at an investment decision, not on its results, and ask[s] whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment") (quoting In re Unisys Sav. Plan Litig., 74 F.3d 420 , 434 (3rd Cir. 1996). "[S]o long as the 'prudent person' standard is met, ERISA does not impose a 'duty to take any particular course of action if another approach seems preferable." Chao, 452 F.3d at 182 . "A court should not find that a fiduciary acted imprudently in violation of ERISA 404(a)(1)(B) [*7] merely because, with the benefit of hindsight, a different decision might have turned out better." Osberg, 138 F. Supp. 3d at 552 . In Leber v. CitiGroup 401(k) Plan Investment Committee,129 F. Supp. 3d 4 , 14 (S.D.N.Y. 2015), the court recognized thatSection 404 of ERISA "focuses on a fiduciary's conduct in arriving at an investment decision, not on its results, and asks whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment." (https://www.bloomberglaw.com/public/desktop/document/Troudt_v_Oracle_Corp_No_116cv00175REBCBS_2017_BL_47916_D_Colo_Feb?1490618456)

Hidden in the message is a description of a fiduciary acting in compliance and the skillset required to do so:

"..a fiduciary's compliance with the prudent-man standard requires that the fiduciary give "appropriate consideration" to whether an investment "is reasonably designed, as part of the portfolio . . . to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment." Accordingly, the prudence of each investment is not assessed in isolation but, rather, as the investment relates to the portfolio as a whole."

The judge is trying to tell everyone how the coin should be forged but no one seems to be listening.

Heads-The ability to provide visible evidence of a methodology that demonstrates portfolio management skills that improves the likelihood of the participants reaching their retirement objectives.

Tails-The lack of visible methodology that demonstrates portfolio management skills that improves the likelihood of the participants reaching their retirement objectives

The legal industry is failing to make Employer Sponsors of Retirement Plans accountable for "Heads" because they lack the Subject Matter Expertise to prove that Employer Sponsors of Retirement Plans have been using coins with only "Tails."

In most cases, Employer Sponsors of Retirement Plans don't even know that their coins don't have a "Heads."

Some judges are trying to tell both that they are flipping the wrong coin.

Neal Shikes has been a Registered Financial Services Industry professional for over 20 years and a Chartered Retirement Planning Counselor, CRPC®. He is also the "Willing Fiduciary" (http://willingfiduciary.com/) associated with Counsel Fiduciary LLC (http://counselfiduciary.com/) and the "Trusted Fiduciary" (http://www.trustedfiduciary.com) and principal associate for Thornapple Associates a provider of Expert Witness Services (http://thornapple.net/).

Additional article by Neal Shikes, "Fiduciary Law Is Trust Law."

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