Compliance June 30, 2015

SCOTUS Won't Hear Reverse Stock Drop Case

The reverse stock drop case Tatum v. RJR Pension Committee has been turned down by the Supreme Court. 
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Monday marked the end of the U.S. Supreme Court’s 2014-15 term, revealing the extensive list of cases the top court will hear next term—and those it won’t.

Among those that didn’t make the cut is RJR Pension Investment Committee v. Tatum et. al, an important Employee Retirement Income Security Act (ERISA) case. The case hinged on what to do when a fiduciary has breached duty of prudence by failing to put in place a prudent process to evaluate an investment decision—in this case, dropping an investment from the plan without thoroughly investigating whether it was prudent to do so. Is it reasonable for the defendant to argue that the result would have been the same even with a prudent process in place and thus avoid liability?

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The 4th Circuit concluded that the defendants failed to have a prudent process because they failed to consider the best interests of the participants. In the face of a failure of procedural prudence, how can the fiduciary prove it still made the right substantive choice?

The defendants wanted a standard that would have allowed them to put on evidence that a prudent fiduciary could have made the same decision. The plaintiffs, and ultimately the 4th Circuit, supported a standard where the defendant must show that a prudent fiduciary would have made the same decision.

In declining to hear the case, the Supreme Court apparently took into consideration a brief from the Solicitor General and the Department of Labor that argued the 4th Circuit got the decision right and that the high court shouldn’t hear it.
Data and Research June 30, 2015

Providers Losing Plan Sponsor Trust

According to Chatham Partners, plan providers may be at risk of losing their clients.
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The annual Provider Loyalty Index from Chatham Partners measures the loyalty of retirement service providers’ clients, placing sponsors on a scale from “loyal” to “favorable” to “at-risk.”

Fewer plan sponsors rated their providers’ services highly this year. On a 7-point scale, the percentage of respondents who ranked their provider as a 7 or 6 for “provid[ing] high quality service” fell from 85% to 73%. Just two-thirds reported that their provider “reduces administrative burden” (68%) and “offers solutions to plan objectives and goals” (67%); both of these figures are down from more than three-quarters in 2014.

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In 2014, 61% of sponsors with decisionmaking authority over their plans were classified as “loyal,” according to Chatham Partners’ calculations. This year, that number has fallen to 57%. The “favorable” and “at-risk” groups each gained 2 percentage points, going from 26% to 28% and 13% to 15%, respectively.

“As providing superior client service is becoming the norm rather than a point of differentiation for providers, it is important that retirement plan providers also succeed in providing value added services that assist plan sponsors in meeting retirement plan goals,” said Chatham Partners CEO Peter Starr.

Last year, two-thirds (66%) of plan sponsor clients were classified as promoters of their providers’ services, 26% were passive, and 9% were listed as detractors. The number of detractors has increased to 12% this year, and at 28%, more sponsors are neutral on their providers as well. Just six in 10 sponsors (60%) can now be counted on as promoters, which could signal impending requests for proposals (RFPs) for many firms.

“It has become evident that the increasing pressures being placed on meeting plan goals is changing the conversation on how providers are evaluated,” Starr added. “Providers are being asked to provide more value by increasingly sophisticated technology at lower margins.”

In its review of more than 11,000 plan sponsors, Chatham Partners asked them to rate the degree to which their provider: “helps fulfill fiduciary responsibilities”; “is committed to technology”; “treats [them] as an important client”; “offers a full range of services”; “flexible meeting [their] unique needs”; “provides good value for the money” and whether they “would recommend [their provider] to others.” Plan providers looking to gain a competitive edge may want to develop their practice in these areas to boost their sponsors’ ratings. 

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