PLANADVISER - January/February 2019 - 48

fiduciary fitness
The Need to
Investigate Alternatives
Courts may have expectations for fiduciaries
SOME recent court decisions have taken different approaches
to the issue of a plan fiduciary's obligation to consider
collective trusts and insurance company separate accounts
as alternative investments to mutual funds. This is an
issue for the applicable fiduciaries of tax qualified plans, as
Internal Revenue Code (IRC) Section 403(b) plans may not,
in general, invest in collective trusts or separate accounts.
Take last year's decision in the case of Johnson v. Provident
Health and Services, 403(b) (Value Plan).
In Re M&T Banks Corp.
ERISA requires
neither the
inclusion nor
exclusion of
collective trusts
and separate
accounts.
ERISA Litigation, also last
year, plaintiffs argued that
defendants had failed to
adequately investigate the
availability of collective
trusts and separate account
alternatives for several nonproprietary
mutual funds
in the plan. Further, they
argued that the mutual
funds offered no material
service or other advantage
to plan participants but
cost the plan millions of
dollars in unnecessary fees.
Defendants, citing Spano
v. Boeing, argued that Employee Retirement Income Security
Act (ERISA) plan fiduciaries are not required to choose separate
accounts over mutual funds and that mutual funds
carry additional reporting governance and transparency
requirements that might make them more attractive than
collective trusts and separate accounts to plan participants.
The District Court indicated that even if true, at the
motion to dismiss stage of pleadings, these arguments did
not preclude plaintiffs from proceeding with the litigation.
When explaining its decision, the District Court stated that
" plaintiffs' alternative investment argument is not a generalized
grievance that the plan lacked collective trusts and
separate accounts: It is based on allegations that [the] defendants
breached their fiduciary duties by selecting particular
mutual funds over specific lower-cost, but otherwise materially
indistinguishable, alternatives. "
The District Court would, in all likelihood, have rejected
a generalized grievance, based on the proposition recognized
by all courts that, as summed up in Hecker v. Deere,
" nothing in ERISA requires every fiduciary to scour the
market to find and offer the cheapest possible fund (which
might, of course, be plagued by other problems). "
To give context, the district courts are rendering decisions
at the earliest stage of the proceedings, and the same
type of analysis applies in this context as with respect to
institutional share classes vs. retail share classes. Defendants
may ultimately be able to persuade the court that
they had legitimate reasons for selecting mutual funds
rather than collective trusts or separate accounts, but that
determination is made at a later stage in the proceedings.
Note also that, in the event that, for a particular service,
a collective trust charged more than did a mutual fund, the
same analysis would be applicable. For example, in Baird v.
Blackrock Institutional Trust Co., a collective trust charged a
higher securities lending fee than did a mutual fund.
In contrast, in Larson v. Aliana Health Systems and White v.
Chevron, the District Courts concluded that it was not a breach
of fiduciary duty to fail to offer lower-cost collective trust
funds and insurance company separate accounts. Defendants
indicated that mutual funds offer greater transparency
than do the other two investment alternatives and have
important regulatory safeguards attached such as diversification
requirements, limitations on leverage, and mandatory
oversight by a largely independent board of directors.
These courts concluded that ERISA requires neither the
inclusion nor exclusion of collective trusts and separate
accounts. In White v. Chevron, the District Court stated that
the comparison was apples to oranges, because, while the
fees for the collective trusts would have been less, these
would have been at the expense of factors that warranted
the higher fees. Rather, it is a judgment call for the applicable
plan fiduciary to provide some context to these cases.
In Terraza v. Safeway, the plaintiff alleged, unsuccessfully,
that the placement of collective trusts and separately
managed accounts into an ERISA plan was a per se ERISA
violation because these alternative investments were not
subject to prospectus and Securities and Exchange Commission
(SEC) registration requirements and, therefore, were
necessarily inferior to mutual funds.
Takeaway: While the failure to consider collective trusts
and separate accounts may not be a breach of fiduciary duty,
it may be an evolving best practice for the applicable plan
fiduciary to at least consider such alternatives.
Marcia Wagner is an expert in a variety of employee benefits and
executive compensation areas, including qualified and nonqualified
retirement plans, and welfare benefit arrangements. She is a summa
cum laude graduate of Cornell University and Harvard Law School and
has practiced law for 32 years. Wagner is a frequent lecturer and has
authored numerous books and articles.
46 | planadviser.com January-February 2019
Art by Tim Bower
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