Focus on Procedure Can Help Protect Against Fiduciary Errors

Neal J. Shikes, The Trusted Fiduciary, and Andrew L. Oringer, Dechert LLP, discuss how establishing and documenting prudent methodologies to make all major decisions—i.e., showing a focus on only the economic interests of the plan participants—can be a key to how one carries out fiduciary duties.

Most working people expect their retirement plans to fund a significant portion of their income in retirement. One possible goal of plan design could be to maximize the likelihood that the plan participants will attain their desired lifestyle when that time comes.

Even with such a plan design, however, no one would expect a plan sponsor to try to override the participant’s judgment as to what that lifestyle should be. A corollary to that perspective could be that, in the context of a participant-directed plan, the sponsor may ultimately decide it’s up to participants to decide how much exposure to risk/volatility they wish to take on. The extent to which sponsors try to educate or otherwise help participants in making investment decisions under the plan varies widely in the market. On the other hand, in the case of defined benefit (DB) plans—and other plans not involving investment direction by participants—overall investment strategies are largely conservative and long-term in their orientation.

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In all cases, though, plan fiduciaries in carrying out their fiduciary duties are responsible for acting prudently, with an “eye single” to the benefit of plan participants and beneficiaries. The federal legal rules tend to take a deferential approach to the regulation of fiduciary activity—effectively, second guessing of the decisions of unconflicted fiduciaries who have then reviewed the appropriate considerations and acquired adequate expertise.

Thus, establishing and documenting prudent methodologies to make all major decisions—i.e., showing a focus on only the economic interests of the plan participants—can be a key to how one carries out fiduciary duties. In many situations, it will arguably be the case that fiduciaries will be viewed as have acted and behaved prudently if the methodologies and procedures have been prudent. 

For example, has the plan sponsor even considered whether the responsible plan fiduciaries have the required skill sets for making appropriate decisions about choosing and overseeing investments—including choosing any outside investment advisers—choosing, selecting and overseeing recordkeepers, etc.? If not, then any breaches of prudence and loyalty down the line, and the outcomes that result, could lead to cascading and interdependent liability.

Sometimes, one may need to look below the surface. Does a baseball player’s brand-new glove prove the player has the tools to be a good fielder? Is the training and education adequate? Is the game plan adequate if those responsible to execute it lack the skill sets to play or, as applicable, assess and manage those who do? Often, there can be multiple layers of causation when something that had seemed shiny and polished develops cracks, as the coats of paint peel away.

When a fiduciary’s decisionmaking is reviewed, it will be reviewed to ensure that only the economic interests of plan participants have been considered in assessing the relative positives and negatives of any particular way forward, viewed against the backdrop of the options available to the fiduciary. When too many poor outcomes materialize from the final decisions and choices, there can be an understandable focus on the applicable decisionmaking process. Essentially, bad results can make participants suspect the process and wonder whether a breach of fiduciary duty has occurred.  

The plaintiffs will essentially have the burden of reverse engineering the outcomes—retracing steps back through considerations of the pros and cons of any given or possible path and the methodologies surrounding those considerations. It is important to note that all breaches of fiduciary duty do not produce quantifiable or easily quantifiable economic damages, but that doesn’t mean that those breaches have not occurred.

Some of the most high-profile Employee Retirement Income Security Act (ERISA) cases have involved little or no ultimate damages. The idea is to do things right process-wise, and to increase the likelihood that things will go well—and that, if they don’t, the fiduciary has good and powerful defenses to liability. The way to protect against such risks is to focus on process and care.

Returning to the baseball metaphor, a fielder can make an error in an inning where no runs were scored, but it still is as an error. Maybe the error results in more work for the pitcher, eventually making the team lose its edge, or otherwise subtly changes the course of the game. Events can be connected in indirect ways, and there can be a veritable wave of consequences—a “butterfly effect”—emanating from any particular misstep. At a minimum, though, maybe the error should at least clue people in to the fact that another error, which may let runs score, is indeed more likely to happen. 

The effect of mistakes should not be discounted just because they lead to other events, the effects of which cannot be quantified in isolation. Courts have generally focused on the processes used at every step, and, assuming no actual conflict of interest, the  court may well be unwilling to allow a claim to continue where proper processes and methodologies are in place.

It seems pretty clear that a plaintiff will always have the burden of proving that a breach has occurred and there has been a loss. The law may be less clear when it comes to having the burden of tying the breach to a loss. When the focus is on outcomes instead of methodology, the fiduciaries are put in the arguably unfair position of being second-guessed for actual investment outcomes, rather than for a breach of fiduciary duty.

In effect, when the focus is on outcome, it is almost as though the loss itself shifts the burden of proof to the fiduciary to show that it behaved prudently. Such an approach seems patently wrong and flatly inconsistent with ERISA’s regulatory scheme. Where plan sponsors and fiduciaries focus on avoiding conflicts and proper expertise of responsible plan fiduciaries, together with pursuing prudent processes and methodologies, they will have put themselves in a better position to resist litigation successfully.

Prudence and loyalty, the twin pillars of fiduciary duty, are evidenced by the fiduciary’s behaviors, choices and methodologies, not by outcome. Where those responsible for the plan have kept their eyes on the ball, potential plaintiffs will have a difficult hurdle to overcome.  

Neal Shikes is a chartered retirement planning counselor (CRPC), “The Trusted Fiduciary” and principal associate for Thornapple Associates, a provider of expert witness services. Andrew L. Oringer is co-chair of the ERISA and executive compensation group at Dechert LLP and leads the firm’s national fiduciary practice. The authors gratefully acknowledge the assistance of Lany L. Villalobos, an associate at Dechert LLP, in the preparation of this article.

 

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 authors do not necessarily reflect the stance of Institutional Shareholder Service (ISS) or its affiliates.

Retirement Confidence Up, But Concerns Remain

While retirement confidence ticked up for workers in the 2019 Retirement Confidence Survey, many are still concerned about debt and health care expenses and are not financially prepared.

The 2019 Retirement Confidence Survey (RCS) from the Employee Benefit Research Institute (EBRI) finds two-thirds of American workers (67%) feel confident in their ability to retire comfortably, though only 23% feel very confident. The share of workers reporting that they feel either very or somewhat confident has increased compared with last year (64% in 2018).

Retirement confidence continues to be strongly related to retirement plan participation, whether in a defined contribution (DC) plan, defined benefit (DB) plan, or individual retirement account (IRA). Workers reporting they or their spouse have money in a DC plan or IRA or have benefits in a DB plan from a current or previous employer are more than twice as likely as those without any of these plans to be at least somewhat confident (74% vs. 39%).

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Almost three-fourths of workers (72%) report feeling very or somewhat confident about being able to afford basic expenses in retirement, including 27% who feel very confident. However, 41% of workers are not too or not at all confident they will have enough money for medical expenses in retirement, and 48% do not feel confident about having enough money for long-term care in retirement.

The RCS has consistently found a relationship between debt levels and retirement confidence. In 2019, 41% of workers with a major debt problem say they are very or somewhat confident about having enough money to live comfortably in retirement, compared with 85% of workers who indicate debt is not a problem. On the other hand, 32% of workers with a major debt problem are not at all confident about having enough money for a financially secure retirement, compared with 5% of workers without a debt problem.

Preparing for retirement

Approximately two-thirds of workers (66%) report that they or their spouse have saved any money for retirement. Nearly as many (61%) report that they are currently saving for retirement. Workers who have any retirement plan are dramatically more likely than those who do not have such a plan to report they or their spouse have saved any money for retirement (79% vs. 17%), and to say they or their spouse are currently saving for retirement (75% vs. 12%).

A sizable percentage of workers say they have no or very little money in savings and investments. Among RCS workers providing this type of information, 40% report that the total value of their household’s savings and investments, excluding the value of their primary home and any DB plans, is less than $25,000. This includes 19% who say they have less than $1,000 in savings. Approximately one in 10each report totals of $25,000–$49,999 (9%) and $50,000–$99,999 (9%) and two in 10 report having $100,000–$249,999 (19%) and $250,000 or more (23%). Workers who have a retirement plan have significantly more in savings and investments than do those without a plan. Nearly six in 10 workers without a retirement plan (56%) report having less than $1,000 in savings and investments, compared with just 9% among workers with a retirement plan.

Just four in 10 workers (42%) report they and/or their spouse have ever tried to calculate how much money they will need to have saved so that they can live comfortably in retirement. Workers reporting that they or their spouse participate in a retirement plan are significantly more likely than those who do not participate in such a plan to have tried a calculation (50% vs. 12%).

Some workers, but not majorities, report they have taken other steps to prepare for retirement. These include estimating how much income they would need each month in retirement (39%) and calculating how much money they would need to save by the time they retired so they (and their spouse) could live comfortably in retirement (37%). Three in ten workers have thought about how much money to withdraw from their retirement savings and investments in retirement (33%), planned for an emergency expense in retirement (31%), and have calculated how much they would likely need for retirement health expenses (29%).

Nearly three in 10 workers (28%) report that they (and their spouse) are currently working with a professional financial adviser. In addition, a slightly greater share (33%) expects to work with a professional financial adviser if they are not currently working with one. While professional advisers are one of the most used sources of information for retirement planning, workers use many different sources of information including their employer or information from their work (24%), family and friends (22%), and online calculators and planning tools (21%). However, 29% of workers say they use none of the sources offered.

Confidence of retirees

As the RCS usually finds, the level of confidence expressed by those already in retirement continues to be greater than those yet to retire. Eighty-two percent of retirees report feeling either very or somewhat confident about having enough money to live comfortably throughout their retirement years (compared with 75% in 2018). Just over one-third of retirees feel very confident (35%), while 18% say they are not too or not at all confident.

Eighty-five percent of retirees feel at least somewhat confident in their ability to afford basic expenses throughout their retirement years. Eighty percent are very or somewhat confident about having enough money to cover medical expenses, and 59% feel very or somewhat confident in their ability to pay for long-term care.

As in prior years, there is a big gap between when active workers expect to retire and retirees say they actually did. Workers continue to report an expected median retirement age of 65, while retirees report they retired at a median age of 62.

Workers expect to retire later

Workers are notably more likely to say they expect to retire at age 70 or older. More than three in 10 (34%) expect to retire at 70 or beyond or not at all. A small share of workers is adjusting their expectations about when to retire, perhaps in recognition of the fact that their financial preparations for retirement may be inadequate. In 2017, 14% of workers said the age at which they expected to retire changed in the past year, and of those, the large majority (78%) reported their expected retirement age increased.

Workers planning to delay retirement gave the following reasons:

  • Can’t afford to retire (49%);
  • Lack faith in Social Security (46%);
  • Health care costs (45%);
  • Wanting to make sure they have enough money to retire comfortably (44%);
  • Higher-than-expected cost of living (41%);
  • Need to pay current expenses first (36%); and
  • The poor economy (32%).

As one might expect, workers who are not confident about their financial security in retirement plan to retire later, on average, than those who express confidence. For example, 64% of workers who are not confident in their retirement financial prospects say they either will not retire or do not know when they will retire, compared with 27% who are very confident.

Four in five workers (80%) plan to work for pay in retirement, compared with just 28% of retirees who report they have actually worked for pay in retirement.

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