Making companies act in the best interest of their employees when they set up retirement plans for their benefit makes plenty of sense, especially in today's cutthroat financial industry. But when fiduciary duty hampers workers from making their own investment decisions -- and accepting the consequences of those decisions -- it goes beyond financial protection to take away potentially lucrative investing opportunities.
With the rise of 401(k) plans, workers have had to assume responsibility for investing their own retirement savings prudently. By making the shift away from traditional pension plans, employers have tried to get out of the investing business, merely acting as a conduit by which employees can set up their own investment strategies. However, employers face potentially huge liability when they act as fiduciaries for their 401(k) plans, and lawsuits are increasingly part of the ordinary course of business for employer plan-sponsors.
The correct legal standard would force employers to provide the best possible options for workers to invest. But then, employers should get out of the way rather than being held to an ongoing standard to evaluate the investment choices they make available to workers.
Setting up a fair playing field...
Where fiduciary duty makes the most sense is in evaluating whether employers give their workers the best starting point they can get. In a 2009 case, Deere (NYSE:DE) and plan manager Fidelity faced allegations that the farm-equipment maker chose primarily Fidelity funds in exchange for accepting revenue-sharing fees paid by employee fund-shareholders. A federal appeals court decided in favor of Deere and Fidelity, holding that the employer didn't have to offer only low-fee investment options to workers.
Yet a more recent case involving Wal-Mart (NYSE:WMT) raised a similar issue involving fund share classes. Often, the same mutual fund offers different classes of shares that charge different fees. A lawsuit from workers argued that Wal-Mart should have negotiated with financial institutions to use more favorable share classes, and although a federal court originally dismissed the case, an appeals court reversed that decision, and a settlement was eventually reached.
This part of fiduciary duty does the most good for plan participants, because it reduces the friction from high costs that can sap your long-term retirement returns. It encourages companies to treat workers better by giving them smart investment options.
...but not guaranteeing success
Unfortunately, companies face lawsuits far more often when something goes wrong in the financial markets. By reading fiduciary duty as somehow requiring that employers know in advance when certain investments will fail, companies have to deal with frivolous legal action all the time.
Many of these cases involve company stock. Ever since the collapse of Enron, employee lawsuits have typically arisen whenever a company's shares fall. In some cases, the companies involved have faced legitimate claims of fraud and other misconduct that all their shareholders shared. Yet often, especially during 2008 and 2009, such lawsuits were based on the notion that fiduciary duty included protecting workers from making losing investments -- even when it was the workers themselves who chose company stock over other investment alternatives.
Two recent cases show the challenges that companies face. In one suit against Fifth Third Bancorp (NASDAQ:FITB), workers argued that SEC filings that the bank made were misleading, and since they were incorporated into the 401(k) plan's summary plan document, a federal appeals court found that the lawsuit made a legitimate claim. Yet a similar case against GlaxoSmithKline (NYSE:GSK) made before a different appellate court came to the opposite conclusion, holding that because the company's SEC filings weren't made in its capacity as the plan sponsor, it didn't allow for a claim of breach of fiduciary liability.
The right way to manage a 401(k)
Arguably, the best solution for everyone involved would be to replace the existing employer-dependent 401(k) scheme with expanded IRA-style retirement accounts where workers can make their own broad-based investment decisions. That way, low-cost options would be available to all. Yet with the current system unlikely to get replaced anytime soon, employers and workers alike need to focus on the importance of providing smart investment choices and spend less time fighting legal battles over investments gone wrong that are based solely on hindsight.