By Gregory L. Ash, Spencer Fane Britt & Browne LLP
The turmoil in the financial markets, while troubling for individual investors, also has potentially significant implications for qualified retirement plan fiduciaries under the Employee Retirement Income Security Act (ERISA). Individuals and committees who have investment authority over retirement plan assets should reevaluate their portfolios and policies in light of these developments.
Review Defined Benefit Funding
Fiduciaries of defined benefit plans should pay especially close attention to market developments. Plans that were nearly “at risk” (for single employer plans) or “endangered” (for multiemployer plans) under the 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 midyear 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.
Review 401(k) Investment Options
Many defined contribution plan fiduciaries are 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 U.S. Department of Labor has long taken the position that if the plan’s fiduciaries have selected the funds from which participants may choose imprudently, the 404(c) shield is unavailable.
All ERISA fiduciaries are required to fulfill their duties prudently and in light of “the circumstances then prevailing.” 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 existing conditions could affect the plan.
Steps To Take
Individual circumstances will dictate whether and how plan fiduciaries should react to market conditions. At a minimum, however, fiduciaries should consider the following steps:
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. Call 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. For defined benefit plans, 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 might hurt a little less if they can be spread out over several months.
Gregory L. Ash is a partner in law firm Spencer Fane’s Overland Park, Kansas office, where he is a member of the firm’s employee benefits group and chair of its ERISA litigation group. He contributes to the firm's Benefits Law Center Blog.