Data & Research October 18, 2017

Plan Committees Consider Monitoring Investments the No. 1 Priority

Adhering to plan governance and minimizing plan risk are the next priorities.
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Callan Institute took a look at the practices of retirement plan committees to find out what they are doing right and what they could be doing better. Callan discovered that plans with more than 10,000 participants are more likely to have both an investment and an administrative committee, while plans with less than 10,000 participants tend to have a single committee.

Among investment and single committees, members consider monitoring the fund lineup to be their No. 1 priority, Callan said in its report, “It Takes a Committee: The Best Ways to Govern DC Plans.” These committees then ranked adhering to plan governance and minimizing plan risk as their No. 2 priorities. Among administrative and single committees, the first priority was tied between plan governance and process and participant retirement readiness.

Key findings from Callan’s survey reveal that committees should not become too large, i.e. more than seven people. When they do, lines of responsibility become blurred. Because committees vote, it is better to have an odd number rather than an even number of members. Not all committees give their members fiduciary training, which, Callan says, is imperative. Callan also recommends that the head of the committee, who understands the strategic objectives of the plan, set the committee agenda, rather than the committee members.

On average, investment committees tend to have six to seven members. Administrative committees tend to have five or fewer members, and single committees have anywhere from four to seven members, Callan found. The institute also advises that committees hire people by their job function rather than by their job title. This, Callan says, “streamlines the nomination process in the event of turnover or organizational restructuring, where a specific job title may be unfilled for a period of time or even cease to exist.”

Callan also says that members of the C-suite, such as a firm’s general counsel or chief financial officer, should not be voting members, as they might have conflicts with insider information. It may be desirable to include HRIS staff, not necessarily as a voting member, when decisions made by the committee(s) may affect payroll and HR technology programming or other benefits within the organization. Callan also suggests that committees set term limits for up to seven years for members, so that while committees can benefit from those with experience, they incorporate people who can lend new insights, and that these terms be staggered, so that the committee enjoys the benefits of both perspectives at any given time.

The most common number of committee meetings a year was four, which Callan recommends. Callan also says that “fiduciary training is vital for committees to operate efficiently and safely. Comprehensive fiduciary training is warranted at the formation of a committee, for new members and as a refresh for all committees at least every few years.”

Committee members believe they are doing an effective job; on a scale of one to five, with five being the most effective, investment committees ranked themselves as 4.6 on average, administrative committees 4.7, and single committees 4.5. Callan’s report can be downloaded here.

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Compliance October 18, 2017

District Court Halts Some Portions of MIT ERISA Challenge

Interpreting and applying a series of detailed recommendations from a magistrate judge, the district court will allow some parts of the litigation against MIT’s retirement plan fiduciaries to proceed. 
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The U.S. District Court for the District of Massachusetts has issued a preliminary ruling on an Employee Retirement Income Security Act (ERISA) lawsuit alleging mismanagement and disloyalty on the part of Massachusetts Institute of Technology (MIT) defined contribution retirement plan fiduciaries.

Readers may recall how this suit was introduced alongside a series of others targeting big-ticket U.S. universities—all of them filed by Schlichter, Bogard & Denton seeking various damages and remedies for many tens of thousands of employees enrolled in the universities’ defined contribution (DC) retirement plans. The suits contend these universities, as ERISA fiduciaries, breached their duties under the law to protect the retirement assets of their employees and retirees. Common to all three complaints are allegations that each of these universities “breached their duties of loyalty and prudence under ERISA by causing plan participants to pay millions of dollars in unreasonable and excessive fees for recordkeeping, administrative, and investment services of the plans.”

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In the MIT case, plaintiffs allege breaches of the ERISA duties of loyalty and prudence arising out of the plan’s inclusion of retail class options instead of institutional class options in the funds provided by Fidelity Investments. In addition, plaintiffs allege that Fidelity was paid excessive compensation for its recordkeeping services and that MIT never engaged in a competitive bidding process for those services. According to plaintiffs, the plan was structured to fund “an illicit kickback scheme whereby Fidelity received inflated fees at the expense of the plan’s participants in exchange for making donations to the MIT endowment.”

Carefully considering the arguments at hand, as well a report and recommendation from Magistrate Judge Marianne B. Bowler, the district court has “approved the dismissal of the duty of loyalty claim under §1104(a)(1)(B) in Count I but not the duty of prudence claim under §1104(a)(1)(A) in the same count.”

This was in fact the recommendation from Judge Bowler, as laid out in the district court order: “Magistrate Judge Bowler found that the conduct regarding the excessive management fees did not plausibly state a claim of violation of the duty of loyalty because plaintiffs’ theory was speculative. This court will accept and adopt that conclusion. Plaintiffs rely on untenable claims such as that Abigail Johnson, CEO of Fidelity, sits on MIT’s Board of Trustees. Plaintiffs do not allege that Ms. Johnson was involved with the plan, however, and she was not on the Board when Fidelity was selected as the investment provider.”

NEXT: Important ERISA caveats 

The district court decision spells out a number of key caveats impacting this type of ERISA litigation, explaining why it is dismissing some aspects of the various claims while permitting others to go to a full trial. As an example, the court makes the following distinction: “Defendants contend that MIT’s 2015 investment plan reconfiguration, which eliminated hundreds of options and retained only one Fidelity option out of 37, demonstrates that the duty of loyalty was not breached. That argument, although accepted by the magistrate judge, is discounted because ameliorative measures taken after disloyal actions do not absolve defendants of their breach.” This line of thinking stems directly from Tussey v. ABB, in which the Eight U.S. Circuit Court of Appeals concluded that although the fiduciaries “did not always favor Fidelity as much as they could, or seize every opportunity to send Fidelity more of the participants’ money such conduct does not satisfy one’s fiduciary duties.” Nevertheless, the district court will accept and adopt the recommendation to dismiss the loyalty claim in Count I as speculative.

The district court’s order continues by noting that Magistrate Judge Bowler found the allegations with respect to the excessive management fees plausibly state a claim for breach of the duty of prudence. This district court “will accept that conclusion.”

“Reading the amended complaint in plaintiffs’ favor, they plausibly allege that defendants failed to obtain identical lower-cost investment options,” the decision states. “Defendants dispute that those options were identical but, at this stage, plaintiffs’ allegations state a claim. If defendants did, in fact, include higher fee options when identical lower fee options were available, they failed to act with the care, skill and prudence required by ERISA. The court will accept and adopt the magistrate judge’s recommendation that the prudence claim in Count I may proceed.”

Turning to some of the additional allegations, Magistrate Judge Bowler recommended dismissal of the duty of loyalty claim under §1104(a)(1)(B) in Count II but not the duty of prudence claim under §1104(a)(1)(A) in the same count. “The district court will accept and adopt that recommendation,” the decision confirms. Further, Magistrate Judge Bowler “recommended denying defendants’ motion to dismiss plaintiffs’ claim for a prohibited transaction involving assets of the plan under §1106(a)(1)(D). She recommended dismissing the §1106(a)(1)(C) claim arising from mutual funds in the Plan but allowing the claim as to non-mutual fund options to proceed. The district court will reject the former recommendation but accept and adopt the latter.”

Additional details and argumentation on claims that will be dismissed versus allowed are available in the text of the district court order, here.

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