PLANADVISER - Winter 2023 - 35

Case Sensitive
had wildly underperformed its benchmark over a 10-year
period. This fund also barely surpassed the return of a money
market investment, which offered much less risk. Finally, the
Global Opportunity Fund-despite its poor performance-
featured an expense ratio higher than any other investment
option available to Verizon plan participants. These allegations
are sufficient to defeat a motion to dismiss. "
The parties went on to negotiate, this July, a settlement of
$30 million for a class of approximately 160,000 participants.
One-third of the settlement will go to the law firms representing
the class, with the remainder going to plan participants
as tax-deferred contributions to
their accounts or rollovers into individual
retirement plan accounts.
The Discussion
Despite the settlement, this case
provides important insights for fiduciary
retirement advisers.
Daniel Aronowitz, the owner
and founder of Euclid Speciality
Managers, underwriters of
fiduciary
insurance in Washington, says
holding fiduciaries to account for
investment underperformance over a
brief period of time " could potentially
open up many plans to allegations of
underperformance. "
The plaintiffs argued that fiduciaries
should switch out investment
options after 36 months of underperformance,
but, Aronowitz says,
this really is not long enough to fairly
judge the prudence of an investment,
especially in a retirement context.
Retirement
investments
are
normally made with an eye toward
the long-term, and one cannot determine whether
the fund is underperforming unless " at least five to 10
years " have passed and the asset has shown clear signs
of distress. Aronowitz says most advisers recommend
against switching out retirement investments frequently,
as this can result in unnecessary losses and higher fees.
The Global Opportunity Fund was first introduced
to the plan in 2007 and removed in 2017, a 10-year span,
but, Aronowitz notes, " 2008 was a washout for the entire
market, " and many other
investments underperformed
their benchmarks as well.
Further, Verizon made changes to its fund offerings
in the meantime during its quarterly fiduciary meetings,
" tinkering " with them and " was hardly asleep at the wheel. "
Mark Boyko, an ERISA plaintiff attorney in St. Louis,
along with partner Bailey Glasser, says that funds of funds
such as those in Verizon's plan, are not uncommon among
larger plans. These funds do require " greater diligence on
the underlying funds, " and this " generally involves higher
fees, " but larger plans can often accommodate this burden
prudently through " economies of scale. "
Yet, Boyko explains, custom funds, though not inherently
imprudent, are still suspect. " Off-the-shelf " funds from asset
managers " generally have lower fees " and " have asset allocations
that have been tested across multiple economic cycles, "
echoing arguments made in the plaintiff's pleadings.
Some fiduciaries will create custom funds to meet the
... one cannot
tell whether the
fund is underperforming
unless
" at least
five to 10 years "
have passed
and the asset
has shown
clear signs of
distress.
specific investment needs of their participant population,
but this is something of a " cop-out, " Boyko says, because
off-the-shelf funds, especially TDFs, are also designed
with specific investment needs in mind. " The goal of all
target-date funds, " custom or not, " is
to prepare the participant for retirement
around the date of that targetdate
fund. " There is thus little to no
advantage in making custom TDFs, at
least for most plan sponsors, he says.
Although " no investment is inherently
prudent or imprudent, " under
ERISA, according to Boyko, it is imprudent
to include an investment if it has
a lower return but with a similar risk
profile as another similar product-
which the plaintiffs alleged of various
funds in the Verizon plan.
Boyko says the case law on timing
is thin. How quickly an investment
should be dropped due to underperformance
is something that " experts
will debate in basically every case. "
Despite this vagueness, Boyko
noted some features that can make
funds an easy target for a lawsuit that
advisers should keep in mind.
He notes that some funds can
be tested based on their strategy
rather than timing. If a fund says, for
example, that it protects investors from an economic downturn,
and then does significantly worse than the market
average during a recession, then there is hardly a need to
debate a specific number of years a fiduciary should wait
before removing the investment. The hypothetical fund
" didn't do what it was supposed to do, and sometimes you
can tell that very quickly. "
Aronowitz and Boyko both agree, however, that it can
be difficult to predict which cases proceed past the motion
to dismiss stage. " We think it's a crapshoot, " Aronowitz
says. " The same set of facts can go either way, depending on
which judge you have. "
Boyko says, " If you find a pattern " to which cases beat
motions to dismiss, and which ones do not, " Please let me
know. " He adds that there is a " certain level of inconsistency
in what cases are dismissed and which ones aren't, "
but complaints challenging funds that are brand new, that
have a long period of underperformance, or that represent
a conflict of interest for the fiduciaries are more likely to
survive a motion to dismiss. -Paul Mulholland
Plan Management | Winter 2023 | planadviser.com 35
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PLANADVISER - Winter 2023

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