Outside-IN

Outside-INblog

Outside voices and views for advisers

Appointing and monitoring a 401(k) investment manager under ERISA

A recent district court decision has implications for how retirement plan sponsors should monitor their adviser

Jul 13, 2017 @ 2:48 pm

By Marcia S. Wagner

Employee-benefit attorneys advising retirement plan sponsors frequently mention that plan fiduciaries are not liable for the acts or omissions of an appointed investment manager, and aren't obligated to invest or otherwise manage plan assets subject to their oversight.

However, the relevant section of the Employee Retirement Income Security Act of 1974, Section 405(d)(1), does not exactly state that. It provides that if a named fiduciary appoints an investment manager to manage the assets of a plan, then no trustee shall be liable. In the recent case of Perez v. WPN, the Department of Labor took a curious position, saying that since the plan administrator and named fiduciaries of the plan were not trustees, they could not take advantage of the safe-harbor relief under ERISA.

Thankfully, the District Court for the Western District of Pennsylvania disagreed with the DOL. It concluded that ERISA intended to grant safe-harbor relief to fiduciaries who have been granted control of the assets of a plan and who have properly appointed an investment manager to manage plan assets, even if the named fiduciaries are not designated as trustees.

Had the DOL prevailed, the benefits to a plan sponsor or investment committee would have been significantly diminished, because they would need to be trustees of the plan to obtain the benefit of the safe-harbor ERISA relief.

The district court also addressed the issue of the duty to monitor an investment manager, the principles of which would also be applicable to the monitoring of any investment adviser to a plan.

In that discussion, the court referenced a DOL amicus brief that had been filed in an Oklahoma district court case elaborating upon that monitoring duty. In that brief, the DOL stated that "in most instances, it will be enough that appointing fiduciaries adopt and adhere to routine procedures sufficient to alert them to deficiencies in performance which could require corrective action, such as the implementation of a system of regular reports on the investment fiduciaries' decisions and performances."

The DOL explained that appointing fiduciaries are not charged with directly overseeing plan investments, as that would be duplicating the responsibilities of the investment manager. However, the fiduciaries "are required to have procedures in place so that on an ongoing basis they may review and evaluate whether the investment managers are doing an adequate job, and the procedures that are implemented allow the appointing fiduciary under the applicable circumstances to assure themselves that the investment managers are properly discharging their responsibilities."

The time for review of the monitoring procedures is measured under a standard of reasonableness. As the District Court summarized, the minimum requirement is that the appointing fiduciary imposes a regular monitoring procedure. The DOL's guidance requires, under the applicable facts and circumstances, the following:

• the appointing authority must adopt routine monitoring procedures;

• the appointing authority must adhere to those procedures;

• the appointing authority must review the results of the monitoring procedures;

• the procedures must alert the appointing authorities to possible deficiencies; and

• the appointing authority must act to take required corrective action.

The district court emphasized that an appointing fiduciary fails to satisfy the duty to monitor by merely implementing procedures allowing for regular reporting on the investment managers. The duty to monitor is a substantive duty, and "if an appointing fiduciary is relieved from liability simply by implementing monitoring procedures with regular reporting, even when monitoring reveals a need for corrective action, but the appointing fiduciary does not act, the duty to monitor is reduced to a mere procedural implementation."

In sum, Perez v. WPN represented a partial victory for both the DOL and plan fiduciaries appointing an investment manager. Fiduciaries who appoint in accordance with plan procedures can be relieved of responsibility for investing plan assets, even if they are not trustees. However, fiduciaries have a significant and substantive continuing obligation to monitor an appointed manager.

Marcia S. Wagner, managing and founding partner of The Wagner Law Group, specializes in ERISA and employee benefits.

0
Comments

What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

Jul 10

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

BNY Mellon's Pershing's Sholes: Growth, tech shaping the future of advice

What's top of mind for advisers today? Tom Sholes of BNY Mellon's Pershing says the huge growth in the RIA space is driving innovation.

Latest news & opinion

Merrill re-evaluates commission ban in retirement accounts

The wirehouse's wealth management group announces a fresh look at the ban now that the DOL rule is on the brink of death.

10 biggest retirement mistakes

Adhere to enrollment deadlines and distribution rules or pay a hefty penalty.

DOL fiduciary rule on brink of death as key deadline passes

Justice Department didn't petition the Supreme Court to rehear the case. A mandate from the 5th Circuit would finally lay the fiduciary rule to rest.

Finra to overhaul broker information system, cut compliance costs for broker-dealers

The move is intended to cut compliance costs for firms as well as make the registration and disclosure process more efficient.

SEC rule proposal doesn't include 401(k) sponsors in 'best interest' advice

Plan sponsors are left out of the equation because they don't appear to fall within the definition of "retail" investor, legal experts say.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print