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Category: Regulatory (Page 1 of 2)

Questioning 401k Lawsuits Based on Investment Outcomes

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On June 8, 2017

In Department of Labor, ERISA, Litigation

http://www.401khelpcenter.com/401k/shikes_fiduciary_coin_2017.html#.WTccp4jyvIX

Investment results are outcomes. No one can predict the excess return relative to a benchmark (Alpha) that is usually associated with active investment management. Then it should come as no surprise that no one can predict the market as a whole (beta). Choosing investments is a subjective endeavor.

So why are so many legal actions and allegations against Employer Retirement Plans Sponsored Plans based on subjective endeavors with unknown outcomes? Even via an appeal, the judge will allow the journey to the door but, without the keys, will never allow the door to be opened.

Loyalty and prudence is demonstrated in the behavior and methodology of the fiduciary and judges have no compunction in stating this:

“However, a plan fiduciary’s actions should “not be judged ‘from the vantage point of hindsight.'” Chao v. Merino, 452 F.3d 174 , 182 (2d Cir. 2006) (quoting Katsaros v. Cody, 744 F.2d 270 , 279 (2d Cir. 1084). Cf. Pension Benefit, 712 F.3d at 716 (noting that the “prudent person” standard “focus[es] on a fiduciary’s conduct in arriving at an investment decision, not on its results, and ask[s] whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment”) (quoting In re Unisys Sav. Plan Litig., 74 F.3d 420 , 434 (3rd Cir. 1996). “[S]o long as the ‘prudent person’ standard is met, ERISA does not impose a ‘duty to take any particular course of action if another approach seems preferable.” Chao, 452 F.3d at 182 . “A court should not find that a fiduciary acted imprudently in violation of ERISA 404(a)(1)(B) [*7] merely because, with the benefit of hindsight, a different decision might have turned out better.” Osberg, 138 F. Supp. 3d at 552 . In Leber v. CitiGroup 401(k) Plan Investment Committee,129 F. Supp. 3d 4 , 14 (S.D.N.Y. 2015), the court recognized thatSection 404 of ERISA “focuses on a fiduciary’s conduct in arriving at an investment decision, not on its results, and asks whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment.” (https://www.bloomberglaw.com/public/desktop/document/Troudt_v_Oracle_Corp_No_116cv00175REBCBS_2017_BL_47916_D_Colo_Feb?1490618456)

Hidden in the message is a description of a fiduciary acting in compliance and the skillset required to do so:

“..a fiduciary’s compliance with the prudent-man standard requires that the fiduciary give “appropriate consideration” to whether an investment “is reasonably designed, as part of the portfolio . . . to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment.” Accordingly, the prudence of each investment is not assessed in isolation but, rather, as the investment relates to the portfolio as a whole.”

The judge is trying to tell everyone how the coin should be forged but no one seems to be listening.

Heads-The ability to provide visible evidence of a methodology that demonstrates portfolio management skills that improves the likelihood of the participants reaching their retirement objectives.

Tails-The lack of visible methodology that demonstrates portfolio management skills that improves the likelihood of the participants reaching their retirement objectives

The legal industry is failing to make Employer Sponsors of Retirement Plans accountable for “Heads” because they lack the Subject Matter Expertise to prove that Employer Sponsors of Retirement Plans have been using coins with only “Tails.”

In most cases, Employer Sponsors of Retirement Plans don’t even know that their coins don’t have a “Heads.”

Some judges are trying to tell both that they are flipping the wrong coin.

The Fiduciary Spectator

By

On May 18, 2017

In Department of Labor, ERISA, Fiduciary Awareness, Litigation

“Do you find out how the pitcher is throwing by asking the fan in the stands or the batter who was in the batter’s box.”

Attorney Firms continue to be spectators in a sport that requires experience to win. It is clear by the allegations:

“…. accuses them of self-dealing to promote the firm’s mutual fund business and maximize profits at the expense of the plan and its participants.”

“…. accused of forcing its employees into expensive, poorly performing mutual funds….”

“…. caused participants to pay recordkeeping and administrative fees that were multiples of the market rate available for the same services.”

If ERISA of 1974 established standards of conduct and requirement for disclosures why do law firms continue to base their allegations on outcomes instead of breaches of behavior?

Before filing a case where there may be Fiduciary Breaches, Law Firms ought to seek a “batter” who has Subject Matter Expertise in:

. Portfolio/Wealth Management techniques/analytics
. Financial Technology; providing visible evidence of methodology

Breaches in trust are not the same as contractual breaches though the DOL seems to be trying to appease the culture via the BICE.

Until Attorney Firms seek help from those who have the skill sets to uncover the required portfolio and oversight methodologies before the filing, they will continue to be but a spectator in this sport.

Fiduciary Prologue to a Cross-Examination

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On May 11, 2017

In Current Events, ERISA, Fiduciary, Fiduciary Awareness, Fiduciary Oversight, Litigation, Regulatory

The litmus test for suitable behaviors and the products that result, is woven from Fiduciary Responsibility. Breaches are born from a lack of methodology which materializes in behaviors and product selection. Perhaps these behaviors are best characterized in Trust Law which describes the prudence, commitment, and loyalty that the trustee has for the beneficiary of the asset.
According to Black’s Law Dictionary, a trustee is:
“The person appointed, or required by law, to execute a trust; one in whom an estate, interest, or power is vested, under an express or implied agreement to administer or exercise it for the benefit or to the use of another.”

In addition, Fiduciary Duty is:

“A duty to act for someone else’s benefit, while subordinating one’s personal interests to that of the other person. It is the highest standard of duty implied by law (e.g. trustee, guardian).”

The fulfillment of Fiduciary Duties becomes apparent where there is evidence of behaviors and methodology, in “content and oversight,” that improve the likelihood that the beneficiary of the asset(s) achieve their goals.

When one is compelled to discover evidence of fiduciary behaviors, clues materialize in the products that were purchased, the timing of the purchases, how such products meshed and correlated with other assets, the level of compensation, and any compensation relationships if applicable. If these facts were not transparent to the inquirer then, chances are, they weren’t to the beneficiary of the assets. Thus, the path of behavior and methodology discovery will extend and fork to include oversight.
Expert Witnesses and Subject Matter Experts
Even though there are many attorneys disciplined in ERISA and Class Actions, few have any experience in money management, financial technology, and the application of the law to fiduciary matters. That is why attorneys need assistance from Expert Witnesses and Subject Matter Experts before the case is filed.
Choosing the right experts can be a daunting task especially when the correct questions to ask are not known. Career consultants and Business Advisors are very good at methodology, modeling, and quantifying evidence. Many, however, have only “kept score from the stands” and have never “stepped into the batter’s box.” There is a clear difference between those who have applied their skill sets in different environments and those who quantify the opinions of people that do. In addition, it is probably best to seek assistance from someone who has been a fiduciary as opposed to someone who hasn’t. This is also critical in the cross examination.

Fiduciary Law Is Trust Law

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On February 15, 2017

In Department of Labor, ERISA, Fiduciary, Fiduciary Responsibility, Regulatory

http://www.401khelpcenter.com/401k/shikes_fiduciary_law_trust_law_2017.html#.WKOx-zsrLIU

The words most associated with fiduciary responsibility are prudence, trust, duty, and loyalty. Fundamentally, these words describe acts wholly aligned with putting the client’s interests first.

There seems to be plenty of evidence that the Employee Retirement Income Security Act of 1974 (ERISA) and the U.S. Department of Labor’s (DOL) most recent fiduciary clarification are modeled after trust law. Indeed, with respect to the fiduciary standard of care, trust law can go to a place where contract law cannot. Perhaps the two can be differentiated by one fundamental distinction: behavior vs outcome.

It is noted in ERISA: §1103. Establishment of Trust; (a) Benefit Plan Assets to Be Held in Trust; Authority of Trustees

In addition, the employer sponsor and its administrator admit the plan’s funding and benefit arrangement, at the very least, is that of a trust in the form 5500 which is necessary to satisfy annual reporting requirements (Section 9a & 9b).

Furthermore, it can be argued that there is a hint of “trust-like” obligation via the mandated surety bond which guarantees the faithful performance of duties.

Clarity will materialize if there is an admission that a trust relationship exists and yet this is rarely evidenced in class action filings, arguments by most of the financial services industry, and politicians. A trust relationship immediately becomes apparent by the duties owed to the beneficiary of the asset by the trustee or to parallel, the duties owed to the participant by the fiduciaries of the employer sponsor.

In a trust or fiduciary relationship, investment options and partnerships must be maintained and/or chosen with transparency and be free of conflicts of interests. For simplification purposes, there must be visibility in both content and oversight.
◦Content may be defined as investment options and its associated performance, costs, commissions, and fees.
◦Oversight may be defined as the fiduciary’s obligation to monitor the performance and behavior of all partnerships, including administrator, recordkeeper, auditor, attorney, investment advisor, money manager, and all parties where there has been a noted fiduciary transfer of duties.

Confusion between the two is often seen in legal filings. For example, did the breach occur because the investment options performed poorly or because no one was monitoring who chose them? Were the recordkeeper’s fees unreasonable or was there a lack of oversight in choosing and monitoring the chosen recordkeeper? Was there guidance and consistency in the Summary Plan Description?

A visible methodology is required for content and oversight, and yet, how can such a methodology be evidenced other than with the proper use of the interdependent components of various financial technologies (this is yet another article)?

As I read numerous articles and pour through many class actions lawsuits, I wonder if the legal community is too focused on contractual and common law and the financial services industry focused on a transaction-based business model. It can be argued that long-term professional cultural bias can inhibit the development of the necessary skill sets required for subject matter mastery. Fiduciary law is trust law. Accept it.

Neal Shikes has been a Registered Financial Services Industry professional for over 20 years and a Chartered Retirement Planning Counselor, CRPC®. He is also the “Willing Fiduciary” (http://willingfiduciary.com/) associated with Counsel Fiduciary LLC (http://counselfiduciary.com/) and a principal associate for Thornapple Associates a provider of Expert Witness Services (http://thornapple.net/).

Class Action: The Case Against JPMorgan Chase

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On February 7, 2017

In Current Events, ERISA, Fiduciary, Fiduciary Awareness, Fiduciary Oversight, Fiduciary Responsibility, Litigation

A Class Action suit has been filed against the fiduciaries of JPMorgan Chase’s 21 billion dollar Retirement Plan on 1/25/2017.

Typical to most of these cases, it is “a class action brought pursuant to §§ 409 and 502 of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 1109.” This is a lengthy complaint that describes a lot of investment content that includes the following allegations described in two counts:
. “failing to adequately review the investment portfolio..”
. “retaining proprietary funds…. despite the availability of nearly identical lower cost and better performing investment options.”
. “failing to affect a reduction in fees..”
. “failing to offer commingled accounts…. despite their far lower fees…”
. “the Defendants breached their fiduciary duties by failing to adequately monitor other persons..”

Causation, as described in the complaint, was “because substantial assets of the Plan were imprudently invested.”

There seems to be a lot of content and outcome evidence in this Class Action and a reference to the assets being held in a trust (which is mandated by ERISA). To this author, there does not seem to be an obvious statutory definition to Trust Law in our Courts. Perhaps it was never codified. However, trustee duties regarding the assets entrusted to him/her are characterized through judicial creation by the courts and the ensuing regulations. In a Trust relationship, rights are created and the behaviors owed by the trustee to the beneficiary that adhere to those rights are characterized. It seems to me that if Fiduciary Duties are characterized by the behaviors that are owed by the Trustees the causation of the breaches should focus on a lack of or a misguidance of those behaviors instead of outcome. Where market outcomes cannot be controlled, fiduciary behavior can be.

Fiduciary Culture Shock

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On December 19, 2016

In Department of Labor, ERISA, Fiduciary, Fiduciary Awareness, Fiduciary Responsibility, Regulatory

Some may argue that The Department Of Labor’s clarification on fiduciary responsibility is complex. It seems that this rationale is focused on the industry’s willingness and ability to adhere to it.

Some may argue that the regulation clarification is not complex at all. ERISA has existed for 42 years and Trust Law for far longer. Perhaps the fiduciary behaviors that are required to fulfill the intricacies of the required duties pose a challenge to the prevailing culture. Did the regulation suddenly become complex after 42 years?

Is the regulation complex or did the regulation expose a generation (or two) who grew complacent in not putting their clients’ interests first?

Wells Fargo: Another Class Action Filed

By

On December 1, 2016

In Current Events, ERISA, Fiduciary Responsibility, Litigation

A new Class Action was filed against Wells Fargo on 11/22. The lawsuit accuses Wells Fargo of using their own Target Date Funds as the Qualified Default Investment Alternative (QDIA) even though they underperformed other Target Date Funds while having much higher expenses. The complaint also stated that this “generated substantial revenues for Wells Fargo” and provided “critical seed money that kept the funds afloat by boosting market share.”

It should be reiterated that ERISA requires that retirement assets are to be held in trust. To be consistent with Trust Law and a trust relationship, behaviors are dominated by the fiduciary duties owed to the participant. The fiduciary must remove all conflicts of interest and provide visible/transparent evidence that their behaviors were in the best interest of the participant.
It is not enough to only accuse, in proposition and allegation, that Wells Fargo breached their fiduciary duties. The plaintiff must do more than demonstrate higher fees. It must be proven that Wells Fargo failed in prudence, loyalty, and trust by not placing the interest of the participants above theirs.

Successful Class Actions will have to exhibit Subject Matter Expertise by proving that the defendant did not have a sound visible methodology to determine investment options and, thus, both the returns and likelihood that the participants will satisfy their retirement goals were reduced.

Fiduciary Focus #2 of 3: Fiduciary Drift: Content

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On November 14, 2016

In Department of Labor, ERISA, Fiduciary, Fiduciary Awareness, Litigation

Black’s Law Dictionary defines prudence as the following:
“Carefulness, precaution, attentiveness, and good judgment as applied to action or conduct. That degree of care required by the exigencies or circumstances under which it is to be exercised.”

A Fiduciary will drift in judgement when the focus is returns. Perhaps this occurs due to a lack of understanding in Wealth Management, Financial Planning, and fiduciary cognizance. For someone untrained, returns can be disguised as beta without consideration to volatility.

Investment options should be chosen and be consistent with the stated and visible goals of the plan while increasing the likelihood that the participants achieve their goals. For most asset classes and capitalizations, it becomes difficult to justify the expenses of active investment managers because few consistently outperform passive indexed investments. If active money management is chosen, there has to be a visible methodology that proves why. There have been Class Actions where this has been the basis.

The fundamental duty of the fiduciaries of a Retirement Plan is to adhere to the terms of the plan, to take reasonable care of the assets, and to act in the best interests of the participants. If this sounds vaguely familiar to the Fiduciary Duties of a trustee for a Trust, it should. ERISA modeled it that way. I wonder if the success rates of Class Action Suits and DOL Actions would improve if Employer Sponsored Retirement Plans were defined as trusts in the complaint and then characterizations are made about Fiduciary Duty and breaches.

Fiduciary Ethics: Removing Conflicts of Interest

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On October 29, 2016

In Department of Labor, Fiduciary Awareness, Fiduciary Oversight, Fiduciary Responsibility

Removing conflicts of interest is a recognized and necessary ethical behavior. So much so that the U.S. Office of Government Ethics (OGE) is dedicated to overseeing the executive branch’s ethics programs, programs whose primary function is to prevent and resolve conflicts of interest. To give you an idea as to the size and scope of this endeavor, there are approximately 4,500 full-time and part-time ethics officials who work in the executive branch that try to provide employees assistance in identifying and resolving potential conflicts of interest.

The OGE’s mission is to create public confidence in the impartiality of government decision making by improving transparency, increasing accountability, and making sure that senior leaders are making decisions based on the interests of the public rather than their own personal financial interests.

The Department of Labor’s clarification attempts to define and enforce the required ethics that bind human behavior in governance where Fiduciary Duty and Responsibility is mandated. It is no different than the OSE’s mission, 18 U.S.C. § 208, or, ultimately, the Constitution.

Fiduciary Focus #1 of 3: Conduct not Outcome

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On October 25, 2016

In ERISA, Fiduciary Awareness, Fiduciary Oversight, Litigation, Regulatory

The most successful Class Actions under the Employee Retirement Income Security Act of 1974 (ERISA) against Employer Sponsored Plan Fiduciaries will uncover behaviors that are detrimental to the participants of the plan. Behaviors, not products or product outcomes.

If, under ERISA or Trust Law, Fiduciaries must act solely in the interest of participants then there must be visible evidence of loyalty and prudence. Only by examining the conduct and methodology of the Fiduciaries can it be determined whose interests were paramount and if a breach of duty has occurred. Once a behavior is suspect it, perhaps, is better to investigate possible causation based on the visible evidence or lack thereof. Walking through “the valley” of causation, is not a journey that a CPA or Attorney should be embarking on alone. They have little experience in the proper conduct and methodologies required to complete the journey.

Outcome may foster presumptions of prudence. Conduct and allegations supporting propositions MUST appear in the complaint.

Next two blogs:

Fiduciary Drift: Content

Fiduciary Drift: Oversight

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