Background
The Department of Labor (DOL) has adopted a significantly more aggressive position relating to the standard of prudence and care imposed on qualified plan fiduciaries who select trust investment managers and negotiate investment contracts. Moreover, litigation relating to such issues is increasingly becoming mainstream news, thus raising awareness and prompting trust participants to question the management of trust funds.
Court decisions in the last decade and Department of Labor guidance suggest that trust fiduciaries should undertake a formal, deliberative review of their written investment policies and procedures, manager contracts, and protocol in hiring and dismissing investment managers. Trustees must not assume that their liability for managing trust assets ends when they hire an investment manager.
What this means for Trustees
The requirement to monitor investment managers has always been a fundamental fiduciary responsibility for trustees of benefit plan trusts. However, a formalized approach is needed with increased regulatory scrutiny and more committed enforcement of disclosure rules.
Trustees should ensure that following are part of their review:
1. Review your Investment Policy Statement (IPS) to check that it includes the following:
- the trust’s purpose and investment policy’s objectives
- a description of the roles of the trustees and managers in the management of trust investments to ensure that the goal and objectives are met
- the process for selection and termination of an investment manager
- a description of the minimum investment quality requirements, asset allocation, permitted and prohibited investments
- a schedule (specific calendar dates) for trust fiduciaries to meet with investment managers to discuss investment policy and monitoring
- a requirement that the trust managers report total investment fees and return every quarter
- a requirement that trustees monitor investment managers’ performance, including specifications of benchmarks, best performed with an outside consultant, preferably one serving as a registered investment advisor
- a requirement that if investments with revenue sharing or retail share classes are retained, documentation of why such investments were considered and adopted
- a requirement that trustees send out a request for a proposal for investment management services every three to five years
2. Review your contracts with your investment managers to check that they include the following disclosures or acknowledgments that must be made by the investment management firm:
- explicit acknowledgment by the investment manager of its fiduciary status under ERISA as the result of accepting appointment delegation by the trustees as investment manager,
- the obligation to furnish quarterly reports to the Trustees
- a duty to report any potential conflicts of interest
- the obligation to provide an ERISA disclosure statement and, where appropriate, disclosures required by Prohibited Transaction Exemption (PTE) 77-4
- a duty to disclose that it maintains an Errors and Omissions Insurance policy and the limits of that policy
- the obligation to follow the IPS
- a confirmation that it will follow all applicable SEC requirements
- the obligation to disclose whether regulators have subpoenaed the investment firm concerning the firm’s trading practices
- the obligation to disclose whether there is any current or pending litigation or administrative actions against the firm
3. Question Investment Manager on:
- the annual total amount of fees and expenses paid
- how fees and expenses impact aggregate return
- how fees and expenses are deemed reasonable in light of the level and quality of services provided and market alternatives (third-party benchmarks)
- how individual service fees associated with optional features offered under the plan trust are determined
- how service fees charged separately to the accounts of individuals who choose to take advantage of a particular trust feature are determined
- whether there are any internal fee structures, e.g., fees paid to third parties, or funds that have a relationship with the investment firm