The recent turmoil in the financial markets, while troubling for individual investors, also has potentially significant implications for ERISA fiduciaries. Individuals and committees who have investment authority over plan assets should reevaluate their portfolios in light of these developments. This is true not only for fiduciaries of qualified retirement plans, but also welfare plan fiduciaries.
Dramatic Changes in the Markets May Require New Investment Strategies
While financial experts continue to argue over the cause(s) of the current crisis and potential solutions, there is a clear consensus that it has dramatically changed financial markets. Even supposedly “safe” money market funds have been affected, as questionable investments in mortgage-backed securities caused several to “break the buck” last week. This new form of risk has direct implications for self-funded health plans, whose assets are typically invested in such instruments.
Fiduciaries of defined benefit plans should pay especially close attention to market developments. Plans which were nearly “at risk” (for single employer plans) or “endangered” (for multi-employer plans) under the new Pension Protection Act standards as of their most recent actuarial valuations could easily fall below those thresholds as a result of investment losses. Fiduciaries of such plans should consider asking their actuaries to conduct mid-year valuations taking into account current market conditions, so that any contribution increases necessary to avoid at-risk or endangered status can be spread over a longer period.
Many Section 401(k) plan fiduciaries are already fielding calls from participants who are concerned about the stability of the investment options available to them. Although fiduciaries have significant protection under Section 404(c) of ERISA from claims arising out of investment losses suffered by individual participants, the Department of Labor has long taken the position that if the plan’s fiduciaries have imprudently selected the funds from which participants may choose, the 404(c) shield is unavailable.
All ERISA fiduciaries are required to fulfill their duties prudently, and in light of “the circumstances then prevailing.” Put simply, this standard means that they must take current conditions into account. It does not mean that fiduciaries should abandon long-term investment strategies, but if their conduct comes into question 18 or 24 months from now, a prudent record probably should reflect that the fiduciaries considered how current conditions could affect the plan.
Strategies for Fiduciaries
Individual circumstances will dictate whether and how plan fiduciaries should react to current market conditions. At a minimum, however, we suggest that fiduciaries consider the following strategies:
1. Request formal input from the plan’s financial advisor. Many advisors are issuing market updates that reflect their general assessment of the situation. Fiduciaries should consider asking their advisor for a more specific assessment of the implications for the plan’s investments.
2. Consider calling a special meeting to evaluate the situation. Waiting until the next regularly scheduled meeting of the fiduciaries – which could be months away – might not be considered prudent in light of the market’s volatility. Even if the fiduciaries decide that no action is necessary, evidence that they engaged in such an evaluation will show that they are acting prudently in light of current circumstances. Be sure to reflect the substance of the fiduciaries’ deliberations in meeting minutes.
3. Defined benefit plan fiduciaries should evaluate whether an interim actuarial valuation is advisable. If additional contributions will be required to avoid falling into at-risk or endangered status, those contributions may hurt a little less if they can be spread out over several months.
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