IMHO: Other People’s Money

I was on a panel at our recent Plan Designs conference, and the topic of qualified default investment alternatives (QDIAs) came up.

There was discussion about the Department of Labor’s proposed regulations on the subject; some observations about when we might expect to see final regulations; and ruminations from co-panelists Fred Reish and Mike Barry about ERISA’s embrace of the concepts of modern portfolio theory (MPT), and the importance of capital accumulation rather than capital preservation in making “appropriate’ investment choices for participants that hadn’t, for whatever reason, elected to make their own.

Then, a plan sponsor in the audience raised her hand and shared the experience of her plan—shared how they had carefully considered the alternatives of a stable-value investment alongside an asset-allocation alternative, and how they had decided on the former, and did so just before the market tanked in 2000. Her perspective was simply this: If they had chosen the asset-allocation alternative—chosen the option that many (most?) experts say they should have—people would have lost money.
These days, I think it is fair to say that “common wisdom’ would call for a different decision. In fact, the expert panel went on to basically lay out all the reasons why that was, if not a bad decision, at least not the one that ERISA’s prudence standard would seem to call for.
I understand the logic and rationale behind that perspective; and frankly, IMHO, most of the admonitions to broaden the DoL’s proposed QDIA definition to include stable-value choices seem self-serving, at best. We all know the issues with stable value—it’s ill-diversified (at least from the standpoint of the participant investor, though I find that the “single asset class’ labels are generally not precisely accurate), pricey, frequently layered with early withdrawal penalties and/or restrictions, and anything but “guaranteed’ (the way the old GIC label suggested). Still, I suspect that, for most of the participants that choose the option (and plan sponsors who choose default investments for participants), stable value provides what they are looking for—a return of their principal investment along with some stated rate of income. Simplistically, a bird in the hand, rather than two in the bush.
That doesn’t mean that stable value will gain the Department of Labor’s (DoL) official endorsement as a QDIA, of course—and, if stable value fails to make that list, it certainly will diminish its allure as a default choice (little wonder that the stable-value industry is up in arms, and that the mutual fund industry, which stands to gain significantly by the apparent endorsement of target-date solutions, has weighed in on the other side). That point of contention notwithstanding, current trends certainly seem to favor the adoption of asset-allocation solutions, rather than stable value, as default investments. Let’s face it: There’s a definite allure to being able to match a defaulted investment choice with the retirement date of a participant—a one-for-all solution that nonetheless seems at least somewhat customized. Finally—and for the lawyers, no doubt, sufficiently—ERISA’s concepts of investment prudence may well presume a certain reliance on the principles of MPT, ultimately demanding an asset-allocation solution.
There remains, however, IMHO, a case for a potentially different result when it comes to making decisions about “other people’s money.’ A solution that doesn’t require a plan sponsor to explain to participants about MPT, or to offer a rationalization about timing and the markets—and one that, certainly on a net basis, might provide a reasonable return compared with the relative volatility of an asset-allocation alternative. I’m not saying that that decision doesn’t have to pass ERISA’s muster, or that it doesn’t have, as outlined above, problems of its own. I am saying, however, that the plan sponsor is clearly responsible for the prudence of these default investments, and that they must therefore ask themselves, “Do I think that this default is prudent for the likely term of its investment in this plan?’
And if they can make a case for the prudence of that decision, then, “common wisdom’ notwithstanding, I think they have a case.

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For some interesting perspectives on the inclusion of stable value as a QDIA, see “SURVEY SAYS: Should There Be a Stable Value QDIA?

See also “Default Ed


Exelon Fee Case Receives Class Action Status

Just days after the dismissal of a similar case in a different jurisdiction, a federal judge has agreed that an excessive fee suit against Exelon Corp. can move forward as a class action.
U.S. District Judge John W. Darrah of the U.S. District Court for the Northern District of Illinois ruled that the five employees who brought the lawsuit were adequate representatives of the class because they say they have been hurt by Exelon’s retirement plan practices. Darrah said there could be more than 23,000 former, current, and future participants represented in the case, based on data in court documents.
Darrah claimed that future class members are often included in the group represented by a collective lawsuit and that it made sense to keep them in the Exelon class because plaintiffs were asking the court to not let Exelon continue with its current retirement plan policies.
The court also pointed out the 7th U.S. Circuit Court of Appeals had ruled in other cases that ex-workers had legal standing if they left the plan “at a smaller benefit than they were due.”
Darrah also asserted that the St. Louis law firm of Schlichter, Bogard & Denton was qualified to represent the interests of the class members. The Schlichter firm has been in the forefront of much of the current plan fee controversy, going after a number of large corporations in the courts over excessive fee and inadequate fee disclosure allegations.
The Exelon suit alleged that Exelon and fiduciaries of its 401(k) plan breached their Employee Retirement Income Security Act (ERISA) fiduciary duties by paying unreasonable fees and revenue sharing payments to providers such as T. Rowe Price and not adequately telling participants about the payments.
In February, the court threw out the employees’ request for recovery of “investment losses” allegedly incurred when the plan allowed its investment managers and service providers to charge unreasonable fees.
One court recently granted a plan sponsor victory with the dismissal of a suit against Deere & Co, and two units of Fidelity Investments (See Deere and Fidelity Fee Lawsuit Thrown Out). U.S. District Judge John Shabaz of the U.S. District Court for the Western District of Wisconsin contended that the defendants had followed current laws and regulations regarding retirement plan fee disclosures.
The Exelon case is Loomis v. Exelon Corp., N.D. Ill., No. 06 C 4900, 6/26/07.

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