Insights from the experts in investment fiduciary responsibility.

The Importance of Using Prudent Practices in Today’s Lawsuit-filled Environment

Posted by Carlos Panksep on October 27, 2016

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Litigation risk is rising for retirement plan fiduciaries. A few large law firms have become particularly adept at finding flaws in the fiduciary practices of plan sponsors and their financial service providers. These firms have been successful in scoring some multi-million dollar wins through favorable rulings or negotiated settlements.   

Encouraged by these early victories, more litigators are coming on to the scene to ferret out plan deficiencies and pursue prosecution. Large corporate and university retirement plans, in particular, are currently in the crosshairs.

Moreover, the Best Interest Contract Exemption (BICE) established under the Department of Labor’s new Conflict of Interest Rule provides additional access to the courts for potential fiduciary breaches in ERISA plans and IRAs. As the regulatory environment and investment marketplace continue to evolve, it can be difficult for plan fiduciaries to keep pace with developments in professional best practices. Initial conformity is not enough, as complacency can lead to missed opportunities to serve investors better and expose plan fiduciaries to regulatory and  litigation risks.

Failure to follow fiduciary best practices has become a recurring theme in recent court cases. But what exactly constitutes a “best practice?” The Centre for Fiduciary Excellence (CEFEX) assesses hundreds of plan sponsors, advisors and other financial serve providers each year to verify conformity to practices that are substantiated in law, regulation and generally accepted investment theories. Specifically, CEFEX assesses conformity to more than 20 multi-part practices that are detailed in the “Prudent Practices” handbooks published by fi360. Separate handbooks cover practices for stewards (e.g., plan sponsors, foundations and endowments and trustees), advisors and investment managers.

In each of the fi360 handbooks the practices are presented as part of a recommended four-step decision-making process for investment fiduciaries, as summarized below:

1) Start by organizing your approach to managing the plan. Take time to fully comprehend the law, governing documents and other guiding sources for proper conduct.

2) Formalize your approach by adopting an effective investment policy statement and establishing proper portfolio diversification.

3) Implement your changes by putting all of the planning, organizing and formalizing that was involved in the initial stages into practice, especially with respect to conducting sound due diligence on investment managers and other service providers.

4) Finally, monitor how well the plan and processes that have been put in place are working, and make adjustments as needed to serve investor’s best interests. This includes responding to changes in economic or market conditions, benchmarking the quality and pricing of services to the plan, and addressing any circumstances that may materially impact how the plan should be managed.

Fiduciary obligations are not particularly onerous, but they are frequently misunderstood or overlooked. Staying current on best fiduciary practices and embedding them in the standard operating procedures of all plan fiduciaries is the best way to mitigate regulatory and litigation risks, as well as to serve the best interests of plan participants and beneficiaries.

Don’t delay in arming yourself with the knowledge and best practices of a true fiduciary. As the number of lawsuits continues to grow, a little preparation with reasonable ongoing attention can go a long way to keep the regulators and litigators at bay.

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