Outside-IN

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

Oct 09

Conference

Diversity & Inclusion Awards

Attend the industry’s first event celebrating diversity and inclusion as well as recognizing those who are leading the financial services profession in this important endeavor. Join InvestmentNews, as we strive to raise awareness, educate... Learn more

Featured video

INTV

How interest rates have affected different types of insurance

Social media and engagement editor Scott Kleinberg and reporter Greg Iacurci discuss a common theme in this week's popular insurance stories.

Latest news & opinion

Private Ocean grows to $2.2 billion with acquisition of Mosaic Financial

Combined financial planning operation gives the firm an expanded footprint in the San Francisco area.

Joe Duran has a game plan, and anyone can play

The CEO of United Capital built a formula for holistic financial planning that any firm can tap into — for a price.

LPL video about private equity looks like a swipe at Cetera

Recruiting video warns about potential consequences for advisers when a PE firm buys a broker-dealer.

Ladenburg chairman Phillip Frost steps down

The SEC charged Frost with fraud earlier this month.

Envestnet Tamarac partners with Schwab, TD on digital account openings

Auto-filling documents designed to make onboarding more efficient for RIAs and more convenient for clients.

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