Remedial Pension Plan Solution: The Absentee Trustee


Eleanor Shellstrop has been running her fledgling business, The Good Place, for about seven years now. She established a 401(k) profit sharing plan somewhere around year 2 on the recommendation of her CPA. CPA set up the plan for her with a bundled service provider. Whatever the CPA put on the paperwork (never discussing it with Eleanor) is how the plan was made and how it remains. Relying on her payroll manager, Janet, to keep dues flowing, Eleanor was very pleased with herself.

The Good Place is randomly selected by the Department of Labor (DOL) for a fun investigation. Reading Investigator Chidi’s DOL letter, Eleanor is confused by half of the requested items and calls her CPA.

“Michael, they seem to keep asking about minutes, procedures and investment tracking. What is this all about?”

“Eleanor, you were in charge of making sure the plan was working properly and overseeing the investments. You didn’t do that?

“When did you tell me that?”

This investigation is going to be a bumpy ride.

What should a fiduciary do?

ERISA requires that all persons who exercise control or discretionary authority over the management or assets of the plan do so prudently and only in the best interests of the participants. Where Eleanor first went wrong was laying out a plan without taking the time to figure out what she needed to do and allowing a random salesman to make all the decisions. In addition, ERISA comes with a fiduciary duty to oversee service providers and investments.

Section 404(c) of ERISA requires that a plan that allows participants to direct the investment of their accounts must provide a “wide range of investment alternatives.” This means that Eleanor should have ensured that her retirement plan offered at least three investment alternatives:

1. each of which is diverse;
2. each of which has significantly different risk and return characteristics; and
3. which overall allow participants to select investment options that match their risk and return needs.

One of the key legal lessons learned comes from the United States Supreme Court’s decision, Tibble vs. Edison International [575 U.S. 523 (2015)]. The lesson is that a prudent plan fiduciary must act quickly to replace a fund that is not performing at the level it should. To be able to take this action and know that the fund is not performing well, the plan sponsor must monitor the funds on a regular basis.

So what did Eleanor do wrong? She hasn’t done any monitoring since day 1, when her broker set up the plan. Basically, she went with the “set it and forget it” mindset. After 5 years, the chances that all the initial funds selected will still perform above the benchmark are quite slim.

Which raises the following key question: what is the reference that should be used by Eleanor?

How do you monitor investments?

Eleanor has a few choices. She can learn to monitor investments herself or hire a financial professional to help her. One option is to hire a 3(21) financial advisor to help monitor investments, provide reports and make recommendations. She will still have to make all the decisions, but at least she will be guided. Option 2 is for Eleanor to hire an investment manager 3(38). This professional will monitor Eleanor’s investments, report to her, and make all investment decisions for her. (Interesting observation: after talking to several ERISA litigators, collectively, we can’t think of a single major lawsuit where the plan sponsor used a 3(38) investment manager.)

Eleanor decides she wants to become a prudent fiduciary and begins to read and learn how to properly monitor the investments in her plan. For starters, she logs online to get the current fund range and performance information of the respective funds. Just in this initial action, she is surprised to see that there are a few funds that have had negative performance for a considerable period of time.

The development of a written investment policy statement (IPS) is a highly controversial fiduciary tool. There is no requirement in ERISA to have a formal written IPS. The purpose of the IPS is to provide the plan’s investment trustee with benchmarks and standards on how investments are chosen, how they should be measured and when they should be replaced.

IPS, like investments themselves, should not be created and then forgotten. This is a living document that will need to be reviewed periodically and amended as necessary. (For example, Eleanor may want to add statements about whether cryptocurrency should be offered in the plan and if not, why?)

On the other hand, the concern of some legal parties is that if Eleanor has such a written IPS and does not follow it, she will be in violation of ERISA (which requires her to act in accordance with the plan document and procedures ) . This could open Eleanor to a trial. But even if she chooses not to have a formal, written SPI, Eleanor still needs to have some structure about how she intends to monitor and manage her plan’s investments.

Part of the monitoring process should include writing things down. This means that any official reports she receives from her service provider or investment professional should be kept on file. That doesn’t necessarily mean it has to be on paper, but it does require her to establish a governance record with that historical information to support the decisions she makes. The decisions themselves and the basis on which they were made need to be documented somewhere so that there is proof that the proper procedures were followed.

It is difficult for small employers. Investigator Chidi asked Eleanor for her minutes. If she’s the only member of her company’s management team, why does she need minutes? The answer is simple: in the absence of documentation (it doesn’t have to be official minutes; an internal memo will suffice), there is no evidence of the decision. Also, over time, Eleanor’s memory will fade. It happens even to the best of us. So when interviewer Chidi asks her why she chose one investment over another three years ago, she can pull out her practice minutes/notes that discuss the decision and its process.

The purpose of a pension plan is to invest for the long term, rather than just focusing on quarterly results. Therefore, when Eleanor begins her quarterly reviews of plan investments, she should review performance over a longer period, such as 3 years.

A number of tools are available to assist Eleanor in the review by providing a report comparing plan funds to benchmark funds. These benchmark funds may be index funds, such as the Standard & Poor’s 500 index or a bond index, depending on the asset class being measured. A bond fund would be compared to a bond index. Since there are many criteria to determine which is the best benchmark, this is perhaps when Eleanor relies on the professionals to determine which is the best comparison.

Why are fees so important?

A good reference system and a good portfolio of investments must take into account and compare the costs associated with investments. Over time, a member with $100,000 invested in funds with the same annual rate of return but with a 0.25% expense ratio against 1% fee will end up with $30,000 more in retirement . (See the SEC’s Investor Bulletin for additional reading and examples.) There are certainly more dramatic published scenarios claiming that as much as $590,000 could be lost over time due to the very differential of 1% fee. The thing is, Eleanor has to be careful not to just jump on a fund that has the highest rate of return because it might also have the highest fees, which will eat away at the true value of that fund.

For example, fund A has a one-year rate of return of 15%, which is higher than fund B’s rate of return of only 10%. But fund A has very high fees and will cost 8% per year. Fund B has very low fees of only 2%. Suddenly, overall, fund A is really only performing at 7%, but fund B is performing at 8%. So fund B seems like a better choice.
Plan fees are also the source of numerous lawsuits brought by members relating to their pension plans. About 150 successful lawsuits have been filed in federal court over the past two years and there doesn’t seem to be an end in sight, given the US Supreme Court’s ruling in Hughes v. Northwestern University [595 U. S. ____ (2022)]. If The Good Place 401(k) plan has a menu of the most expensive funds available to Eleanor, there’s a chance she’ll be accused of not acting in the most prudent way, and certainly not in the best interest. plan participants.

Although a plan is not required to always offer the cheapest funds available, the trustee must explain why a particular fund is still in range despite the fee. Perhaps attendees asked for the availability of a real estate or technology fund that has the potential for amazing performance, but has the highest fees. These minutes and/or memoranda can describe the decision-making process and justify why such a fund was appropriate.


It’s not too late for Eleanor just because she’s been tipped off that the DOL is coming for a visit. She can still show Investigator Chidi that she is on the right track and has reached a milestone in her fiduciary oversight responsibilities. As a participant, Eleanor herself can benefit from a leaner and stronger fund menu. It all starts with a solid understanding of its fiduciary obligations and a solid investment screening and monitoring program.

Alison J. Cohen, Esq., CPC, is an associate at Ferenczy Benefits Law Center LLP.

The opinions expressed are those of the author and do not necessarily reflect the views of ASPPA or its members.

©2022, Ferenczy Benefits Law Center LLP. Used with permission. The original appeared here.


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