The importance of supervising pension plans

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On April 26, Fidelity Investments announced that it was expanding its retirement plan investment offerings to allow employers to offer digital assets, particularly bitcoin, as an investment option in the investment ranges of the 401(k) plan. It is expected that many employers will come under pressure from employees to add this investment option.

Employers have also considered adding environmental, social and governance (ESG) funds to their investment menus as an option that better aligns with company values. The addition of any new investment option, especially if it is a new vehicle, emphasizes the important legal responsibilities associated with overseeing pension plan investment options.

Fiduciary oversight

The Employees Retirement Income Security Act of 1974 (ERISA) requires employers and other trustees to act solely in the best interests of plan participants and beneficiaries. Trustees must act with the care, skill, prudence and diligence in the circumstances that a prudent person acting as a trustee and familiar with pension plan matters would use in administering a pension plan.

Accordingly, trustees should thoroughly investigate the merits of any investment offered by the pension plan. If the trustees do not have sufficient knowledge to evaluate the investments, the trustees should seek expert advice in making the decision.

ERISA provides that trustees are responsible for reimbursing a pension plan for losses incurred if the trustees have failed to comply with their responsibilities. Even if oversight of the plan’s investments has been properly delegated to a financial professional, the employer remains exposed to losses due to indemnification obligations owed to the financial professional.

The importance of proper oversight has never been greater, as hundreds of class action lawsuits have been filed in recent years against individual employers and trustees challenging the use of allegedly reckless 401(k) investments and other planes. These cases, including one filed against the Dartmouth-Hitchcock Clinic in April, involve numerous claims, including that the funds underperform compared to alternatives, have excess fees and have been overinvested in “alternative investments” such as as hedge funds and private equity.

Advance advice on digital and ESG investments

On March 10, the United States Department of Labor issued Compliance Assistance Notice #2022-01, in which it warned pension plan trustees to exercise extreme caution before adding from cryptocurrencies to a range of investments in a 401(k) plan.

The informal guidance covers a wide range of digital assets. The department said it has serious concerns about plan participants’ exposure to direct investments in cryptocurrencies and that such investments pose significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft and loss. The ministry noted that when plan trustees, charged with the duties of care and loyalty, choose to include a cryptocurrency option on the menu of a 401(k) plan, they are effectively informing participants that experts investment savvy have endorsed the cryptocurrency option as a prudent option for plan participants. The department said it plans to investigate plans to allow cryptocurrency investments and take appropriate action to protect participants.

The department’s warning even extended to plans that offered cryptocurrency investments through brokerage windows which surprised experts in light of previous limited guidance on brokerage window monitoring responsibilities.

Unlike new cryptocurrency guidance, there is a long history of departmental guidance regarding the use of ESG considerations in pension plan investment options.

In November 2020, the ministry issued a final rule dealing with “Financial Factors in the Selection of Plan Investments”. It has set a high bar for trustees to justify the use of ESG factors by generally requiring trustees to select investments based solely on consideration of “monetary factors”. If interpreted strictly, the regulation would limit the use of ESG considerations in the selection of pension funds and investments. However, on March 10, 2021, the department backtracked and announced that it would not enforce the final settlement or pursue other enforcement actions against any trustee due to non-compliance with the final rules. The reason the ministry took this action just five months after the final regulations were published was that it had heard from a number of stakeholders who questioned whether the regulations adequately considered and addressed the evidence that the he use of ESG considerations can improve investment value and long-term returns. .

What should trustees do?

Employers and plan trustees should carefully consider adding any new investment option, especially one involving new investment vehicles or investments without a long-term track record. There should be a written investment policy statement that sets out the procedures for adding new investments to the plan and outlines the periodic monitoring of all investments in the plan.

In order to prove that a sound process was followed, a written record of all activities should be created and retained indefinitely in the event of a complaint or service audit.

The department’s new cryptocurrency release effectively places the burden of proof on the trustees to demonstrate that adding such an investment is prudent. Expert advice will be needed to deal with this burden. In the case of an ESG investment, trustees should obtain expert advice on the merits of the investment and carefully establish a written record of why it meets the established criteria for inclusion in the investment menu. . Finally, trustees should keep up to date with departmental directives, as history shows that the department can alter its requirements or change its views.

The department’s recent guidelines on digital assets remind pension plan trustees to carefully select proposed investments in pension plans and then continuously monitor the chosen investments. When special circumstances arise, such as cryptocurrency or ESG investments, trustees must make additional inquiries in order to comply with their fiduciary duties.

John E. Rich Jr., president of McLane Middleton’s tax department, focuses his practice on employee benefits, pensions, ERISA and tax matters. He can be reached at or 603-628-1438.

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