Do you know what your fiduciary investment risk exposure is?
The participants in each of the New York Life Insurance profit sharing and 401(k) plans had a complaint – they found out that the S&P 500 Index Fund offered as a designated investment alternative in their plans was much more expensive than other S&P 500 Index funds in the market, and had been for six years. In fact, the “MainStay Fund” was 17 times more expensive than the Vanguard Institutional Index Fund, the S&P 500 index fund offered by Vanguard that had annual expenses of only 2 basis points, or 0.02% per year, as opposed to Mainstay’s annual cost of 35 basis points, or 0.35% per year. And it wasn’t like the New York Life plans wouldn’t have access to any other S&P 500 index fund at a price similar to the Vanguard fund – the plans had approximately $2 billion in aggregate assets during the period.
Even worse, the MainStay Fund was a New York Life product – and some of the trustees appointed by New York Life to manage the investments of the plans were employees of its wholly owned subsidiary, New York Life Investment Management LLC (NYLIM), which managed the MainStay Fund. Having the New York Life plans in the MainStay Fund pumped up the assets under management in the Fund, which would have made the MainStay Fund more attractive to other investors; although it was alleged that no other plan with assets over $1 billion participated in the MainStay Fund. For this reason, and because New York Life received fees and expenses from the New York Life plans’ investment in the MainStay Fund, the placement of the Fund in the New York Life plans was a conflict of interest (a breach of ERISA’s duty to act solely in the best interest of plan participants and beneficiaries) and a prohibited transaction under the Employee Retirement Income Security Act (ERISA) (“A fiduciary with respect to a plan shall not deal with the assets of the plan in his own interests or for his own account.”)
Based on the assets the New York Life plans had invested in the MainStay Funds, the plaintiffs estimated that the plans overpaid $2.97 million between 2010 and 2014. On February 14th, the parties entered into a settlement agreement where the defendants, without admitting any wrong doing or liability, will pay $3 million, plus $50,000 in expenses in administering the settlement, which will be allocated to the plans for allocation to the affected participants after paying up to $1 million in attorneys’ fees.
What can we learn from this?
- Understand your ERISA fiduciary duties. Because the New York Life fiduciaries made investment decisions that benefitted themselves, there would have been a prohibited transaction even if the fees on the MainStay Fund were not excessive. Even without a loss, the fiduciaries could have been barred from serving as fiduciaries in the future. This was also a failure of the ERISA duty of loyalty.
- Benchmark, benchmark, benchmark. Even if the fiduciaries did not have a conflict of interest, they would have been liable for the failure to investigate whether similar, lower cost funds were available to the plans. This was a failure of the ERISA duty of prudence as well as the duty of loyalty.
- Remember, exercising your fiduciary duties is a matter of process, not results. Document how and why you made your decisions, taking into account things like performance, cost, and services provided. You don’t necessarily have to pick the lowest cost funds available, but you do have to be able to demonstrate your prudent and loyal process.