PLANADVISER - March/April 2018 - 56

fiduciary fitness
Duty to Investigate
Determining whether a plan acts in participants' best interest
THE two fundamental duties of a fiduciary under the
common law of trusts are the duties of loyalty and of
prudence. With respect to the latter, a plan fiduciary under
the Employee Retirement Income Security Act (ERISA) must
act with " the care, skill, prudence and diligence under the
circumstances that a prudent man would use. "
That is a flexible standard and is context-specific, but
some recent cases have drilled down a
bit further to ask whether a prudent fiduciary
would have taken a specific action.
For example, because ERISA's prudence
requirement focuses upon process, rather
than results, courts have uniformly held
that there is a duty to investigate, research
and review a plan's investment options-
and, as ERISA counsel will advise, to
document such investigation. In a context
such as an employee stock ownership
plan (ESOP) in which it is possible to
question a fiduciary's loyalty, fiduciaries
are obligated " to engage in an intensive
and scrupulous independent investigation
of their options to ensure they act in
the best interest of their clients. " Such a
standard still leaves open, however, what
specific actions may be required, an issue discussed in the
following cases.
In the ERISA securities litigation involving Lehman
In this case, the plaintiffs failed to explain in a nonconCourts
have
uniformly held
that there is a
duty to investigate,
research and
review a plan's
investment
options.
Brothers stock, plaintiffs alleged that plan fiduciaries had
breached their fiduciary duty by failing to pursue inside
information held by others. According to plaintiffs, had the
plan committee honored its fiduciary obligation to conduct
an independent investigation into the riskiness of Lehman
stock, it would have uncovered nonpublic information
about the imprudence of continuing to invest in the stock.
As the district court wrote, in elaboration on this theory,
plaintiff's premise was that there was a quantum of negative
information about Lehman stock troubling enough
that a prudent person would have made further inquiries
of corporate insiders.
Whether such a duty exists will, however, need to be
decided at some future date, because the district court held,
and the Court of Appeals for the 2nd Circuit affirmed, that
even if such a duty existed, the plaintiffs could not establish
a breach of fiduciary duty. To establish a breach of the duty of
prudence in this context, the plaintiffs would need to establish
that an adequate investigation would have revealed to
a reasonable fiduciary that the investment was improvident.
clusory fashion how the defendant's hypothetical investigation
would have uncovered the alleged inside information.
There were no specific allegations about what lines of
inquiry would have revealed the information or who, in fact,
if pressed, would have disclosed it to the defendants.
In Dudenhoeffer v. Fifth Third Bancorp, the Supreme Court
held that absent " special circumstances, "
a fiduciary " is not imprudent to assume
that a major stock market provides the
best estimate of the stocks traded upon
it. " To attempt to avoid the strict pleading
standards of Dudenhoeffer, plaintiffs in
Saumer v. Cliffs Natural Resources Inc. alleged
that the fiduciaries' failure " to engage
in a reasoned decisionmaking process
regarding the prudence of Cliffs stock "
constituted a " special circumstance. "
The Court of Appeals for the 6th
Circuit disagreed, holding that a fiduciary's
failure to investigate the merits of
investing in a publicly traded company
does not count as a " special circumstance. "
In explaining why a fiduciary's
failure to independently verify the accuracy
of the market's pricing was not a special circumstance,
the 6th Circuit indicated that the Supreme Court had specifically
stated that an ERISA fiduciary could assume that stock
markets provide the best estimate of a security's value.
Furthermore, Dudenhoeffer had reasoned that an investor's
inquiry into a publicly traded company is unlikely to reveal
a company's true value, much less the future course of its
stock price. Finally, plaintiff's theory suffered from the
same type of pleading deficiencies as were present in the
ERISA securities litigation.
The 6th Circuit explained, while a fiduciary generally
must investigate the merits of an investment, its failure to
investigate an investment decision alone is insufficient to
show that the decision was not reasonable. That is, there
must be a link between the failure to investigate and harm
to a plan.
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 31 years. Wagner is a frequent lecturer and has
authored numerous books and articles.
56 | planadviser.com march-april 2018
http://www.planadviser.com
PLANADVISER - March/April 2018

Table of Contents for the Digital Edition of PLANADVISER - March/April 2018
