ERISA Class Actions and Plan Sponsors Fail for the Same Reasons
By Neal Shikes
Managing Partner, The Trusted Fiduciary
Neal J. Shikes is Managing Partner of The Trusted Fiduciary and has 30 years of experience in the Financial Services Industry and an expansive network. He is an Affiliate Expert Witness Professional of EWCS.
Ironically, Employer Sponsors of Retirement Plans and plaintiff attorneys for ERISA Class Actions must have access to the same set of skills to be successful. This is an absolute necessity because there is no specific road-map to follow with regards to fulfilling fiduciary duty or proving that it hasn’t been fulfilled. Nevertheless, attorneys representing participants in Class Actions and Plan Sponsors/Investment Committees ought to understand ERISA and The Uniform Prudent Investment Act and the skills required for execution if they are to be successful. Combined, they provide a rather abstract guideline as opposed to step-by step instructions. Like any guideline, one must recognize the subject matter expertise related it to it so they can identify the people mastered its tools of execution.
The proper skill-sets must be identified to perform a forensic-like investigation into fiduciary matters. Perhaps we struggle to understand fiduciary responsibilities, culturally, because they aren’t necessarily negotiated between parties trying to advance their self-interest. Instead, fiduciary responsibilities can be recognized by an imbalanced relationship in which one party is highly vulnerable to another. For a Plan Sponsor or Investment Committee, the obligation of means/conduct is an intense demonstration of prudence and loyalty that must be visibly evidenced. Choosing and overseeing investments, record-keepers, administrators, investment advisers, and the financial technology that evidence the methodologies to do so, requires people with different skillsets to work interdependently. Failure to do so leads to breaches of fiduciary duty that only create additional breaches which decrease the likelihood that the participants in the retirement plan achieve their desired lifestyle in their retirement years.
Coincidentally, reverse engineering Employer Sponsored Retirement Plans to determine fiduciary breaches requires the same skill-sets that Plan Sponsors and/or Investment Committees must have AND the functional experience in execution. One shouldn’t expect that attorneys, academics, and damage calculation experts to have functional fiduciary experience with regards to choosing and overseeing investments and integrating fintech to evidence behaviors. It is rather perplexing as to why it is viable to showcase them as experts in the courts and in front of arbitration panels.
Nevertheless, whether one is a fiduciary of a retirement plan or an attorney representing a plaintiff in a Class Action, there is no room for playing “fantasy” fiduciary. It is the difference between observing the game in the stands and playing the game on the gridiron where there is a great deal of physical contact.
I have read and analyzed way too many ERISA Class Actions and all that follows in its aftermath. In reference to a Class Action filing, as someone who has actually played the game of wealth management, I don’t understand how one can educate the court, or anyone, by quantifying outcome instead of behaviors. Sometimes, when I read ERISA Class Actions, I find myself reading the notes of an “on-the scene” reporter instead of a qualified pathologist who has performed an autopsy that provides enough evidence to warrant an investigation. Though my expertise is not law, it just seems like the court needs to see the autopsy which indicates enough probable causation to certify the Class Action. Demonstrating outcome without causation does not convince anyone with discretion bound by legal principles and sources:
- wrong class of shares
- poor relative performance (benchmark and/or peer group)
- investments that overlap in capitalization, style, and security selection
- annuity sub-accounts
- proprietary investments
These are all possible outcomes of a poor methodology that was applied to choose and oversee investment options. In some instances, loyalty can be questioned when proprietary investment options are chosen in favor of alternatives when no viable methodology could have justified it.
If in fact, a Plan Sponsor and/or Investment Committee is supposed to make decisions in good faith and in a prudent manner, then it must be evidenced as such with a viable methodology that does so. Plan Sponsors and Investment Committees must never forget that choosing record-keepers and administrators is more than a business decision but a fiduciary one as well. Larger retirement plans are a painted target for plaintiff attorneys on such issues but, still, only recognizing it as an outcome is not good enough as the instruction manual in ERISA is missing on this as well.
Though credit can be given to those who recognize and interpret the numbers that materialize from poor outcome, are participants in retirement plans and courts looking for statisticians or experts?
This blog was originally posted on TrustedFiduciary.com
Our Expert Blog articles have been posted here with permission of the authors.