A Lesson About Investment Disclosures

Background:

The University Medical Center selected a conservative stable value fund to be the default fund for its 403(b) plan. If plan participants did not make any choices for their retirement plan, they were defaulted into the stable value option. However, participants could also choose to actively invest their assets into the same stable value fund. This is what appears to have started the confusion.

At some point, University Medical Center changed their default fund and elected the safe harbor provisions under a QDIA. The plan chose to transfer all of the assets of the original default (the stable value fund) to the new QDIA (in this case, a life cycle fund). Moving the assets may have been explicitly allowed for those participants that were swept into the plan’s original default fund, but not with regard to those participants who specifically elected to invest their assets in the stable value fund. Those participants found their assets moved to the new QDIA—the life cycle fund—contrary to those participants’ intentional investment choice.

Since plan fiduciaries at University Medical Center did not know which participants were defaulted into the stable value fund and which participants chose the fund, they directed Lincoln Retirement Services Company to send a notice of the change to all participants who were 100% invested in the stable value fund. The letter offered an opportunity to choose to stay in the fund before the transfer date. The plaintiffs—who had actively selected the stable value fund for their 403(b) accounts—charged that this single notice was insufficient and, therefore, a breach in fiduciary duty. They argued that University Medical Center had to prove actual receipt of the mailed notices; many plaintiffs claimed never to have received the notice.

The Verdict:

The U.S. District Court ruled in favor of the defendants, including University Medical Center and noted that neither the defendants, nor the recordkeeper were liable for a breach of fiduciary duty (see “Transfer to NewQDIA Did Not Violate ERISA”).

Recommendations for Plan Sponsors

There are three key takeaways for a plan sponsor from this case:

First, the legal challenge might have been weaker if the client had made a greater effort to contact the plan’s participants. Although the defendants ultimately prevailed, the original cost in all probability would have been minimal had a more elaborate notification procedure been taken by University Medical Center, including sending the information in multiple notices, both physical mailings and electronic.

Second, in an ideal world, plan sponsors work closely with their recordkeepers to make sure services provided are sufficient for their plan participants. However, we do not live in an ideal world. In the aforementioned case, a different recordkeeper with greater sophistication may have had the ability to track the source of the inflows and distinguish if the original purchases were selected by participants or default investments. Furthermore, the suit between the plan participants and University Medical Center might have been avoided entirely if the recordkeepers had differentiated between defaulted participation and those participants who had elected to invest their money in those particular funds. Making that distinction and mapping the assets accordingly could have prevented this case from reaching the courts and minimized the risks for University Medical Center.

Third, plan sponsors should review their documentation and actions with a qualified fiduciary consultant.  Elements of the Bidwell suit hinged upon interpretation of the plan documents. Specifically, the plaintiffs reasoned that the plan administrator had overstepped its authority since the plan document did not provide explicit permission to map stable value assets to the lifecycle funds. A review of a plan’s governance documentation would have determined that the action was not explicitly allowed or disallowed, but the plan fiduciaries might have considered adjusting the plan document to make their case more resilient to legal challenge. Any adjustment would have the ancillary benefit of providing additional transparency and a potential for disclosure as to their intent.

Recognizing the relationship between the principles of fiduciary responsibility, ethical considerations and legal rulings illustrates the importance of considering what’s legal and what’s ethical inherent in the process. It’s a valid question every company should take into account— balancing what’s in the best interest of the corporation and what meets the fiduciary duty owed to the employees as they save for their retirement futures. This can lead to a better practice which manages both risk and responsibility for participants in the process.

Gabriel Potter, AIF, is the Senior Investment Research Associate of Westminster Consulting where he designs strategic asset allocations and conducts proprietary market research. He earned a B.A. in Economics and an M.B.A from the University of Rochester’s William E. Simon School of Business.  

Diana K. Powell, Esq. is the Senior Legal Advisor of Westminster Consulting with more than 20 years of experience advising educational institutions, government bodies and private corporations. She is a graduate of the University of Rochester with a B.A. in Political Science and Albany Law School of Union University, J.D.   

Westminster Consulting is an independent investment advisory and fiduciary consulting firm in Rochester, N.Y. Named a PLANADVISOR Top 100 Retirement Plan Advisor in 2014, the firm is also CEFEX certified by the Center for Fiduciary Excellence. Learn more at www.westminster-consulting.com.