Speakers Say Liability Can Be Minimized When Giving Participants Investment Advice


Pension plan trustees can offer participants much-needed individual investment advice in their participant-directed accounts without undue fear of liability, speakers said during a conference.         

“Plan trustees can offer one-on-one investment advice if they prudently select and monitor the provider of financial advice,” attorney Mark S. Niziak, managing director with New York Life Retirement Plan Services in Westwood, Mass., said during a session of the Investments Institute in Clearwater, Fla., sponsored by the International Foundation of Employee Benefit Plans.         

Niziak, along with Patrick Cunningham, chief executive officer of Manning & Napier Inc. in Fairport, N.Y., also provided suggestions for multiemployer and public pension plan trustees to ensure compliance with the prudence standard under the Employee Retirement Income Security Act and for selecting and monitoring target date funds during a presentation March 4 and a separate roundtable discussion on March 5. Both sessions were titled Trends in Defined Contribution Plan Investments.         

Niziak said that although state and local governmental plans are exempt from ERISA's fiduciary rules, many state and local plans have adopted a “best practices” approach in which they follow ERISA's fiduciary requirements.         

Prudent Selection and Monitoring of Adviser          

Cunningham said that “if a plan provides individual investment advice to its participants, the adviser must be a fee-only financial adviser.” The adviser “can't be someone who is selling a product,” he said.         

In addition to hiring an adviser who is paid solely by the plan, Cunningham said the prudent selection of an adviser requires the trustee to perform a number of “common sense” things such as checking the adviser's references, ensuring the adviser has sufficient years of experience and determining whether the adviser has fiduciary liability insurance.        

Niziak said it was also important to have the adviser acknowledge that it was acting in a fiduciary capacity while dispensing advice to participants.         

To prudently monitor the advice given by the adviser, Niziak said the plan trustee should communicate with participants to uncover any complaints and also ask for reports to determine whether participants were properly diversifying their investment choices. If the reports revealed that participants were mostly invested in money market funds or had a high concentration in risky stocks, “these would be red flags,” he said.           

‘How’ Investment Chosen Matters Most          

In determining whether a plan trustee has satisfied its fiduciary responsibility under ERISA when making an investment decision for the plan, what matters most is not “what investment” the trustee chooses, but “how” the investment is selected, Niziak said.         

He said if a plan is sued by a participant for selecting improper investments, the lawsuit will likely come years after the plan made the investment decision, and the trustees are unlikely to remember years later why the investment was made. To avoid this, he recommended that the trustees document in their plan committee meetings minutes all the factors that they considered in selecting the investment. If done this way, the trustees will be able years later, if necessary, to testify to the specific reasons why the investment was made, Niziak said.         

Reminding the plan trustees in the audience that, under ERISA, they are held to a “prudent expert standard,” Niziak said if a plan trustee isn't an expert, then it needs to “get help or hire and expert.” He said, however, that the trustees can't solely rely on the expert they hire. Instead, trustees have a “duty to monitor” their experts and should check the expert's credentials and references as well as document the process for selecting the expert. In addition, he said that for each investment decision, the trustees should document why they relied on the expert's opinion to make that investment.           

Excerpted from a story that ran in Pension & Benefits Daily (3/6/2014).