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Best Interest and Best Practices #5: What is the Baseline for A Committee to Act in the Best Interest of Its Participants? (Part 2)

This is the fifth of a series of articles titled “The Bests.” The series focuses on Best Interest and Best Practices. Those topics give me flexibility to discuss a range of subjects that affect both service providers, including advisers, and plan sponsors, including 401(k) and 403(b) committees.

This is my second article about the case of Sacerdote v. New York University. As I discussed in my last post, the Court’s opinion pointed out the deficiencies in the understandings and conduct of some committee members. However, the Court ultimately ruled in favor of the plan fiduciaries and against the plaintiffs. Why was that?

Despite the deficiencies (or “bad practices”) of some committee members, others on the committee were engaged and knowledgeable. Obviously, that was an important factor. However, there was more than that. The Court noted that “Between [the adviser’s] advice and the guidance of the more well-equipped Committee members . . . , the Court is persuaded that the Committee performed its role adequately.

In other words, while the involvement of the more informed and better engaged committee members was critical, the committee’s use of a knowledgeable adviser was also important. I can tell you that it was a well-regarded advisory firm with considerable expertise with retirement plans. It’s not clear that, absent the work of the adviser, NYU would have won the case.

One of the claims in the lawsuit was that NYU did not use RFPs as often as it should have. As explained by the Court, “Plaintiffs assert that more frequent RFP processes for both Plans would have exerted competitive pressure on recordkeeping vendors, resulting in either a reduction in fees by an existing vendor or a better deal altogether.” While there were a number of factors reviewed by the Court, one of the important ones was that the committee had successfully negotiated for reductions in recordkeeping fees. As explained by the Court, “In addition, plaintiffs ignore that over the course of several years, NYU’s recordkeeping fees consistently decreased as NYU obtained repeated rate reductions.

Plan committees should benchmark their service providers or issue RFPs on their service providers at appropriate intervals. But that begs the meaning of “appropriate intervals.” A common benchmark is for the costs of service providers to be reviewed every three years. However, the legal requirement is that the plan expenses for service providers be monitored at appropriate intervals. More precisely, that means that they should be monitored when a change in circumstances suggests that monitoring could result in lower costs for comparable services. That could occur as a plan grows or as the competitive marketplace reduces the expenses of service providers.

While the law does not require that committees select the lowest cost providers, committees should use RFPs, benchmarking, and negotiations to ensure that their plans are reasonably priced as compared to comparable plans (for example, plans of a similar size and with similar average account balances).

Another claim was that the committee failed, in its monitoring process, to remove two underperforming funds that allegedly had high fees and poor performance. The Court disagreed, noting that the plan’s adviser provided regular reports on the funds, that the committee discussed the funds at multiple meetings, and that the process was consistent with the plan’s investment policy statement. With regard to one fund – a real estate fund, the Court found that the structure of the fund was designed to be more conservative than a common REIT benchmark. In a sense, the Court concluded that a committee could prudently select a more conservative investment alternative, which might have a lower overall return, if the committee felt that it was appropriate for the plan and the participants.

The second fund was a widely-diversified equity fund including both domestic and international securities. The Court noted that it was “challenging to find an appropriate benchmark.” The Court then went on to say “The Committee focused on the difficulties with benchmarking that the [investment] presented due to its composition. It determined that, as a result of these benchmarking difficulties, the [investment] was one that warranted ‘specialized discussions.’ Such discussions occurred.

While the Court looked at a number of benchmarks, and considered other factors, it appears that the committee’s attention to the unique nature of the fund, the on-going discussions in that regard, and the assistance of the adviser were critical factors. The moral to this part of the story is that a given benchmark may not tell the whole story, and that committee discussions, with help from an investment adviser, can provide better insights than the use of a benchmark (and particularly of a benchmark that does not directly apply to the investment under consideration).

In reflecting on this decision, I have several thoughts. My next post will discuss those. For the moment, though, an important point is that committee processes really matter. Prudence is about the process. This decision confirms that. Committees should have robust discussions about plan investments, service providers, and expenses. The discussion should be documented in committee minutes.

All in all, this decision is a “laboratory” about fiduciary responsibility. There was good and bad, and both provide important information to advisers and committee members.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

Part 1 - Best Interest and Best Practices: Improving Retirement Outcomes #1

Part 2- Best Interest and Best Practices: Improving Retirement Outcomes #2

Part 3- Best Interest and Best Practices #3: Best Practices for Plan Sponsors: Projection of Retirement Income

Part 4- Best Interest and Best Practices #4: What is the Baseline for A Committee to Act in the Best Interest of Its Participants? (Part 1)

Part 6 - Best Interest and Best Practices #6: What is the Baseline for A Committee to Act in the Best Interest of its Participants? (Part 3)

Part 7 - Best Interest and Best Practices #7: SEC Best Interests . . . When? And What About the DOL

Part 8 - Best Interest and Best Practices #8: Fiduciary Training - The Need for Basics

Part 9 - Best Interest and Best Practices #9: Improving Retirement Outcomes


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About this Author

Fred Reish, Drinker Biddle Law Firm, Los Angeles, Labor and Employment Law Attorney

Fred Reish represents clients in fiduciary issues, prohibited transactions, tax-qualification and Department of Labor, Securities and Exchange Commission and FINRA examinations of retirement plans and IRA issues.

Fred works with both private and public sector entities and their plans and fiduciaries and represents plans, employers and fiduciaries before federal agencies such as the DOL and IRS. He consults with banks, trust companies, insurance companies and mutual fund management companies on 401(k) recordkeeping services, investment products and...

(310) 203-4047