U.S. class action points to best practices for pension committees
Pension plan fiduciaries involved in plan governance should consider the recent legal decision of a U.S. district court in Wildman v. American Century Services, LLC (“Wildman”), as a framework for governance best practices, especially in defined contribution pension plans.1 In Wildman, the plaintiffs claimed that the plan fiduciaries had breached their fiduciary duties of loyalty and prudence under the Employee Retirement Income Security Act of 1974 (“ERISA”). Despite the case falling under U.S. jurisprudence, it can provide Canadian pension plan fiduciaries with practical guidance on meeting their duties and managing potential conflicts of interest.
A group of former employees (the “Plaintiffs”) brought a class action lawsuit in respect of a defined contribution 401(k) plan that allows participants to contribute a percentage of their pre-tax earnings and invest their contributions into one or more investment options (the “Plan”).
The Plan was sponsored by American Century Services (“ACS”). ACS, the employer and Plan sponsor, delegated administration of the Plan to the Retirement Committee (the “Committee”). Committee members were comprised of employees with significant experience in investment products, retirement plans and financial markets. Given that the Committee members had significant experience, senior management did not provide any oversight or review of the Committee’s decisions.
The Plaintiffs claimed that ACS, its affiliates and the Committee members (the “Defendants”), breached their fiduciary duties of loyalty and prudence by only offering actively managed funds, by only offering proprietary funds and by causing the Plan to pay high fees. In addition, the Plaintiffs claimed that ACS had breached its duty to monitor the Committee. Lastly, the Plaintiffs argued that the Defendants had engaged in prohibited transactions and self-dealing.
Ultimately, the court ruled in favour of the Defendants. Some of the areas considered by the court are summarized below.
Conflicts of interest
The Plaintiffs argued that the Committee members served as both the employees of the company, and also as fiduciaries, and therefore operated under a conflict of interest which should be inferred as impropriety. The court noted that to serve as a plan fiduciary merely requires the individual to “wear the fiduciary hat when making fiduciary decisions.” Ultimately, the mere fact that the Committee members had competing duties was insufficient evidence to show that their decisions were motivated by a desire to place the company’s interests over those of the Plan participants.
Selection of proprietary funds
The Plaintiffs claimed that the Defendants only considered the employer’s proprietary funds in the Plan, which they argued was evidence of motivation to benefit the company. The court confirmed that it was not disloyal as a matter of law to offer only proprietary funds, and that it was common for financial services companies to offer their own investment funds in their retirement plans.
The evidence demonstrated that Committee members made careful investigations of investment decisions and acted in the best interests of the Plan participants. The Committee believed that the funds were more beneficial to Plan participants, as they had the ability to closely monitor the investments, and could receive direct access to fund managers for consultation. Furthermore, the Committee thoroughly monitored the independent merits of each fund in relation to funds from other asset management companies to determine whether it was a prudent investment and would remain in the lineup.
Failing to offer passively managed funds in the Plan
The Plaintiffs claimed that the Defendants acted imprudently by failing to offer passively managed options. The court found that the Defendants did not act imprudently, and relied on evidence from the Committee which demonstrated that they had given “appropriate consideration” to adding passive options, taking into account the benefits and detriments of adding these funds before deciding not to do so.
Maintaining too many options in the Plan
While the Plan offered a large number of investment options to Plan participants, the court did not find that it was imprudent to do so, given the sophisticated investor base of the Plan participants. The number of options did not lead to confusion or non-participation in the Plan. In fact, the participation rate was shown to be higher than other plans. Notably, the Committee was regularly receiving and considering information regarding the rate at which its employees were participating in the Plan, to ensure that the number of options in the Plan was not causing confusion among its participants.
Monitoring funds on the watch list
Although the Plaintiffs claimed that certain funds remained on the watch list for many quarters despite their poor performance compared to similar funds, the evidence demonstrated that the Committee followed a prudent process in monitoring and retaining funds in the Plan. The court found that the Committee members did not act imprudently, and relied on evidence that the Committee received and reviewed analysis respecting funds which had been placed on the watch list, and continuously monitored the funds on the watch list to come to a reasoned decision to allow them to remain in the Plan.
The Plaintiffs argued that the Defendants had acted imprudently by retaining funds with excessive fees in the Plan. However, the court found that the Committee did not act imprudently. The Committee reviewed relevant information to ensure that the fees were reasonable in light of the fund’s performance and level of risk.
The court’s decision in the Wildman case provides valuable insight into pension plan governance best practices for pension plan fiduciaries responsible for investment monitoring and management.
Pension plan governance refers to the structure and processes in place for the effective administration of the pension plan to ensure the fiduciary and other responsibilities of the plan administrator are met. The following actions of the Committee enabled the Committee and the employer to successfully meet their fiduciary responsibilities and successfully defend against a class action:
- Providing training and information to new Committee members. The Committee provided new members with a “Fiduciary Toolkit” which included a copy of the investment policy statement, an outline of the Plan document and information on their fiduciary duties.
- Receiving advice from experts. The Committee would regularly invite consultants, lawyers and investment professionals to present at the Committee meetings, in order to share research and information relevant to the Committee’s work.
- Keeping thorough and documented meeting minutes. The Committee’s meeting minutes captured the topic of discussion, who initiated questioning, and the outcome of the vote or the ultimate decision.
- Meeting on a regular basis. The Committee met regularly three times a year, and had special meetings on an ad-hoc basis. Each meeting was sufficiently long to fully address each issue on the agenda.
- Preparing and distributing adequate meeting materials to Committee members. The Committee assembled and distributed a set of meeting materials for their meetings, which included such items as the investment policy statement, a list of funds on the watch list, a performance report for the investment options in the core lineup, a Plan update regarding the Plan assets, participation rates, and information respecting each fund’s fees.
Morneau Shepell’s governance experts can assist pension plan administrators in establishing and improving their governance processes, both as a matter of risk management as well as optimizing the pension plan’s performance for members.
1 362 F. Supp. 3d 685 - Dist. Court, WD Missouri 2019.