retirement plans

What do Verizon, US Airways, John Deere and Co., Seagate, Marathon Oil, Ernst and Young and Shell Oil Company all have in common? They all offered Fidelity Magellan as an investment option in their retirement plans in 2010 ( as did 1,400 other companies).

The important question is: Do plan sponsors still offer Magellan?

In fact, some companies have:

1. Removed Magellan from the plan all together,
2. Others have frozen the fund i.e. do not allow new money into the fund but participants can leave current money in the fund
3. And for some, Magellan remains an investment option.

If a company has not removed a poor performing fund from its retirement plan then it is a violation of Department of Labor (DoL) Guidelines, which have been affirmed in the courts. “A fiduciary must initially determine, and continue to monitor the prudence of each investment option available to plan participants.” (4th Circuit Court of Appeals)

The impact of not properly supervising a plan’s investment options is more important then ever. Wal-Mart just agreed to pay $3.5 million to settle a suit because they failed to properly supervise its retirement plan. In another court case, individual plan participants can bring suit against the plan fiduciaries if they feel that they have been damaged.

Consider Magellan’s Poor performance:

• Fidelity Magellan is in the bottom 15% of similar funds (Morningstar ratings) for 1 year, 3 year, 5 year and 10-year time frames.
• The fund failed to match the returns of the Russell 1000 Growth its benchmark
• The fund failed to match the average return of funds of this type.
• Its “risk metrics” (Alpha and Beta) are very poor

The issue is not really that Magellan is a poor performer but rather that Plan Investment Committees (PIC’s) allow the fund to remain in the line up. Under what possible monitoring and removal methodology would any retirement plan continue to offer such a poor performer based on the metrics above?

When a company does not properly monitor the investment lineup and a fund that is no longer appropiate remains available to participants, it could be due to:

• The PIC’s or plan sponsor did not know they had the responsibility
• They did not spend the time to do what they are required to do.
• They inappropriately relied on guidance from the financial services provider which in the vast majority of case that was Fidelity

It makes no difference why since all 3 reasons are breaches of fiduciary responsibility. Having Magellan or any other poor fund in the investment lineup is a time bomb waiting to happen because it could be claimed by a plan participant, or the DoL that there was:

 

Failure to operate for the Sole Best Interest of the Participants

All Plans are required by law to be operated for the sole benefit of the participants. What are the possible benefits to the participants to continue to offer such a poor performing fund in the investment line-up.

 

Failure to identify a potential conflict of interest

ERISA requires that PIC’s identify potential conflicts of interest. All of the companies listed above use Fidelity as their record keeper. It is to Fidelity’s “best interest” to continue to have this fund in the investment lineup since it generates management fees from the fund and as clear that no participant would benefit from using Magellan. It would appear that those companies that did not remove Magellan failed to identify the potential conflict of interest between what is best for Fidelity and what is best for the plan and its participants.

Failure to complete an independent review of the Investments

Fidelity provides retirement plan services to more retirement plans than any other. Fidelity routinely provides investment data to the PIC’s for consideration. Few plans ever get independent data or independently validate the data from Fidelity. When the plan fiduciaries rely solely on Fidelity-provided data, they have violated ERISA for not completing an “independent review”.

Failure to provide the necessary information to the participants

It is hard to believe that any participant would continue to invest in Magellan if they had the proper notifications from the PIC’s as required by ERISA. It is a reasonable conclusion that many participants are not capable of effectively investing their retirement funds without the proper data, which is why plan fiduciaries are required to monitor and remove poor investment options.

Failure to follow their company’s own plan documents

Most retirement plans have an Investment Policy Statement (IPS), which gives direction as to how the PIC’s should select, monitor and remove investments for a plan. If a plan keeps the Magellan fund in the plan’s fund line-up when it continually fails to meet the IPS standards, the PIC’s will have committed a fiduciary breach for failing to follow plan documents.

Conclusion

So, what are you to do if you are a plan sponsor or serve on a plan’s 401(k) committee?  Tracy Tierney, a partner of GCA Law Partners specializing in ERISA, summarizes some of today’s best practices for plan administration and compliance with fiduciary standards as follows:

 

1. Understand Your Plan’s terms.  Every plan sponsor or member of a PIC should know and understand the basic terms of their company’s plan because the plan document is the foundation for plan operations.  Consult ERISA counsel or your third party administration with any questions regarding plan design or application because mistakes can be costly to correct.
2. Understand Your Fiduciary Duties.  Because members of a PIC are plan fiduciaries, each member should understand their fiduciary responsibilities as set for the by ERISA, including those which relate to Plan investments.  This includes the PIC’s duty to monitor and report on the investments offered by the plan.
3. Follow an Investment Policy Statement.  An IPS can be an excellent tool for the PIC.  When followed, it provides evidence that the members of the PIC fulfilled their fiduciary duty by following a thoughtful process.  An IPS should be reviewed annually, and if your plan does not have an IPS, consider seeking ERISA counsel to help you develop one.
4. Utilize an Independent Third Party Investment Expert.  Plan sponsors should not rely solely on their vendors, such as Fidelity, to provide reporting and analysis of investments.  If their vendors are not fiduciaries, they are not required to abide by the same standards of care and prudence, and they are not required to put the best interest of the Plan first.  Having an independent third party investment expert, especially one who is a fiduciary, will help mitigate the risk that the participant’s bests interests are not being put first.
5. Consider a Fiduciary Insurance Policy.  Because members of a PIC may be held personally liable for breaches of fiduciary duty, some companies choose to obtain this insurance, which is different from the ERISA bond that a plan is required to have.  PIC members may also want to investigate whether plan documents provide any indemnification or reimbursement for claims made against PIC members for “fiduciary breaches.”

If, as a retirement plan participant, you are invested in Fidelity Magellan, you should consider doing the following:

1. Move your funds out of Magellan.
2. Request your plan be reviewed and benchmarked by an “independent” fiduciary.
3. Should your company refuse to get an independent review, consider taking to an ERISA attorney to determine if your plan fiduciaries are properly supervising your retirement plan.

The information in this document does not constitute legal advice. For assistance with legal questions specific to your situation, please consult an attorney.

by Michael Chamberlain 

 

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