Stephen Schurr writes an interesting article for The Street.com: “The Seven Deadly Sins of 401(k) Plans.” I concur with Mr. Schurr’s comments regarding the lack of clear guidance for plan fiduciaries of 401(k) plans. The article quotes Don Trone, president and founder of the Foundation for Fiduciary Studies, a nonprofit group that offers training for retirement plan sponsors and providers, as stating:
“If the chairman of a company’s 401(k) committee called the Department of Labor and asks, ‘What should I do to make sure I fulfill all my responsibilities?’ There would be no answer, other than act prudently,” Trone said. If the same chairman then hired an investment adviser to handle the 401(k) plan and “the adviser calls the Securities and Exchange Commission and asks the same question, there would be no real answer,” Trone said. “The industry has never defined the details of a prudent investment process of fiduciaries.”
Comment: It is important to note that the courts have provided some guidance in this whole area, by emphasizing that ERISA fiduciaries must engage in prudent process and procedures in order to fulfill their fiduciary obligations under ERISA. The In re Unisys Savings Plan Litigation case (173 F3d 145 (3rd Cir.), cert. denied, 120 S. Ct. 372 (1999), is a good example. In that case, the plan fiduciaries had invested in Executive Life GICs as an investment for one of its funds, but were held not to have violated their fiduciary duties when the GICs became worthless because the court found that they had engaged in prudent conduct in selecting the investments. (An example of some of the prudent processes mentioned by the court in Unisys: the fiduciaries had hired an experienced investment consultant, and, in evaluating potential insurance companies from which to purchase GICs, had obtained information and ratings from Standard and Poor’s and A.M. Best ratings services that evaluated the stability and potential profitability of the various types of companies. There was also testimony that the fiduciaries had kept abreast of developments in the GIC industry by reading trade publications and journals and that they had available to them SEC forms 10K and 10Q to review prior to making their selection.)
Despite the lack of clear guidance, it is important for ERISA plan fiduciaries to become educated as much as possible and engage in prudent process and procedures in fulfilling their duties and responsibilities under ERISA.