Compliance October 29, 2019

$18.1M MIT Fiduciary Breach Lawsuit Settlement Includes RFP Process

Among the non-monetary elements of the settlement is a requirement to conduct a recordkeeping RFP process that will result in a per-participant fee structure.

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The proposed settlement details in the Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit filed by retirement plan participants at the Massachusetts Institute of Technology (MIT) are now public.

U.S. District Judge Nathaniel M. Gorton of the U.S. District Court for the District of Massachusetts previously moved forward most claims in the ERISA, but granted summary judgment to the defendants for a claim alleging a prohibited transaction between MIT and Fidelity Investments. The Court has now issued a proposed order approving the unopposed settlement agreement, which will take effect pending a fairness hearing to be schedule in the coming months.

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Trial was to begin in the case on September 16, but a few days prior, the parties announced they had reached a proposed settlement agreement, the details of which have only now been made public. Stretching to some 76 pages and including multiple exhibits, the settlement agreement includes dozens of specific provisions which MIT plan fiduciaries will have to adhere to. In entering the settlement agreement, the defense admits no wrongdoing or liability, while the class of plaintiffs agrees to forego future litigation of the matters at hand.

Par for the course, the agreement carves out a sizable portion of the final monetary settlement as compensation for the plaintiffs’ counsel. In this case, roughly $6.5 million of the $18.1 million total settlement amount will be paid to the class counsel, to cover litigation costs and expenses as well as the pre-litigation investigation period. The full text of the settlement agreement is here.

Monetary Relief

According to the text of the settlement agreement, the net settlement amount will be allocated to class members according to a tiered plan of allocation. Under the plan, 25% of the net settlement amount will be paid to class members based simply on the number of quarters during the class period in which they participated in the plan in any amount.

The remaining 75% of the net settlement amount will be allocated to class members based on the actual amount of their investments in the plan funds over the class period, taking into account quarterly balances in all plan funds except for those in the “bond oriented balanced fund” and the “diversified stock fund.” Further, the method by which class members receive their settlement allocations will depend on whether they are characterized as current participants or former participants.

Non-Monetary Provisions

While it is notable to see the dollar amount plan fiduciaries will pay to the class of participants to resolve their claims of mismanagement and disloyalty of retirement plan assets, it is also important to examine the significant non-monetary relief programmed into the settlement agreement.

In the settlement agreement, MIT agrees to comply with the non-monetary provisions for a three-year settlement period. During this period, MIT “shall provide annual training to plan fiduciaries on prudent practices under ERISA, loyal practices under ERISA, and proper decision making in the exclusive best interest of plan participants.” In addition, within 120 days of the settlement effective date, the plan’s fiduciaries shall issue a request for proposal (RFP) for recordkeeping and administrative services for the plan.

The agreement stipulates that the RFP “shall be made to at least three qualified service providers for administrative and recordkeeping services for the investment options in the plan, each of which has experience providing … services to plans of similar size and complexity.” The agreement also requires the RFP “shall request that any proposal provided by a service provider for basic recordkeeping services to the plan not express fees based on percentage of plan assets and be on a per-participant basis.”

Notably, the agreement does not say that the plan must change services providers as a result of this RFP process, but it does say that may be the choice plan fiduciaries make. However, moving forward, “fees paid to the recordkeeper for basic recordkeeping services will not be determined on a percentage-of-plan-assets basis.”

Other parts of the settlement agreement stipulate how the plan will treat revenue sharing payments—in the future routing these back to the plan trust for the benefit of participants—as well as how the plan will be required to inform class counsel of certain actions and decisions during the settlement period.

Opinions October 29, 2019

5 Things to Consider When Selecting TDFs for Your Retirement Plan

A checklist of five things for retirement plan sponsors to consider when choosing target-date funds (TDFs).

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As the default investment option for many Americans’ 401(k) plans, target-date funds (TDFs) have emerged as important and popular investments to help people meet their retirement goals. These funds have strong appeal for plan sponsors balancing fiduciary responsibilities as they seek to drive better outcomes for participants.

For that reason, sponsors have been very responsive to the guidance that the Department of Labor (DOL) issued regarding TDFs in 2013 and have been working closely with consultants and advisers to better understand TDF choices and options. What may seem like small matters of nuance during the selection process could translate to significantly different outcomes over time.

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Here’s a checklist of five things we think are important for sponsors to consider when choosing TDFs:

1) Evaluate funds with your participants in mind. First, ask your provider how it can help ensure that its TDFs are a good fit for the specific demographics of your employee base. And because demographics shift over time, revisit this question as part of your regular TDF evaluation process.

Get a sense of how the TDFs could protect your older employees in down markets. Make sure you’re making a conscious and deliberate decision about risk exposure especially as the glide path nears the target date. And be sure to consider not only high-level equity or fixed-income allocations, but also allocations to more volatile sub-asset classes such as emerging markets equity and high-yield bonds.

Additionally, ask your provider if it factors participants’ emotions and behavioral biases into its investment process. The range of threats to retirement savings include things such as market risk, longevity risk, sequence risk, inflation risk, tail risk and interest rate risk. But human decisionmaking concerning those risks differs depending on the person’s stage of life. Those behavioral patterns can and should be factored in to a TDF’s design to help drive toward successful outcomes for retirement savers.

2) Know that plans of every size have access to low-cost investments. There are TDF cost-saving opportunities today that didn’t exist just a short time ago, both in mutual fund and collective investment trust (CIT) structures. Larger plans served by consultants, committees and regular review processes are clearly capitalizing on the opportunities to lower investment costs. But plans of every size have access to low-cost choices and are no longer bound by minimums of days gone by. Small plans in particular need to understand that today the industry offers index TDFs in both mutual fund and CIT flavors with expenses under 10 basis points (bps) and no minimum investment levels.

3) Do a deep dive on the underlying strategies. Implementation of a TDF can be fully passive, fully active or a hybrid of the two. Each has its merits. Therefore, it’s important to have a thorough understanding of the strategy and how it’s being implemented.

This is particularly important when you’re considering active strategies, as approaches there can vary widely. Are there multiple fund families represented or only one? Additionally, ask your provider what its process is for selecting and removing the underlying active funds, and if that has ever been enacted. After all, you’ve probably made fund changes in your plan’s core lineup. If your TDF provider has never made any changes to its underlying funds, be sure you find out why.

4) Choose “to” or “through,” and understand why you did. There’s a lot that’s misunderstood about the difference between TDFs that have glide paths that extend to or through a retirement date. So consider the issue closely. Make sure you have a rationale for why you prefer one over the other for your plan.

Contrary to common belief, TDFs with to glide paths are not always more conservative than those with through paths. In fact, a through fund may potentially provide better downside protection, while benefiting investors well past its target date.

When making a final decision, consider the asset allocation, architecture type and methods for managing absolute risk.

5) Make sure you trust the choices your provider has made about the underlying funds in its TDFs. TDF providers often use their own proprietary funds within their TDF solutions, and in many cases that makes perfect sense. When considering TDFs that use active strategies, make sure there are no compromises. In those cases, we like the flexibility that an open architecture format offers, but every plan sponsor needs to do its own gut check. One rule of thumb as you evaluate TDFs is to ask yourself if you would be comfortable offering each of the underlying funds in your core lineup as a stand-alone fund choice.

Conclusion

As a fiduciary, you must consider all aspects of TDFs to ensure they’re well-suited for your plan. Be careful about what may seem like easy choices. There are no shortcuts, so do your due diligence. This checklist is a good place to start.

Jake Gilliam is head client portfolio strategist, multi-asset strategies, with Charles Schwab & Co., Inc.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services (ISS) or its affiliates.

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