Litigation is a poor way to regulate the investment industry

The question of fiduciary responsibility—and specifically minimization of the risk of lawsuits—has been a growing concern for many retirement plan sponsors in recent years. It has reached the point where the specter of potential litigation is weighing too heavy in too many decisions that are being made, to the detriment not only of plan sponsors, but also of participants.

Fiduciary responsibility

I am writing this post in New Orleans, where we have just wrapped up the 2015 Russell Institutional Summit. As always, there has been a wide range of discussions about a long list of topical issues, and I will come back to many of those in future posts. Fiduciary responsibility wins the race to be the first topic covered post-Summit because of how striking it was that this issue has now forced its way into conversations that really would have been more productive without it.

The title of this blog post—that litigation is a poor way to regulate the investment industry—is an observation that was made by James Fleckner of Goodwin Proctor LLP, a leading ERISA attorney, in his session on the changing attitudes toward fiduciary obligations. It captures the problem here: that not only is the growing focus on this question a challenge for plan sponsors, but that it's creating a less effective retirement system, and acting against participants' best interests, too.

Playing it safe?

The inefficiency arises because fiduciaries are understandably keen to minimize the risk of lawsuits. Even if a lawsuit is ultimately unsuccessful, it is expensive and distracting to deal with. It's important to be able to defend your actions if necessary, but better to avoid having them questioned in the first place.

So, whether implicitly or explicitly, the question "what decision is least likely to get us sued" becomes a consideration in decisions. A classic example is fees for 401(k) investment options: in the current environment, it can be tempting to choose the cheapest investment option. But nobody really believes that the cheapest is always the best choice. (Cheapest sushi? Cheapest doctor? Cheapest lawyer?) Participants may be missing out.

It is perhaps ironic that the self-interest of the fiduciary is, of course, not a good reason to make a decision. Indeed, one pretty sure-fire way to get yourselves sued is to put it in the minutes that "we weren't sure what was best for the participants here, but we think this course of action is the safest one for us as fiduciaries." It's a complex picture. All of which makes this an uncomfortable time to be a fiduciary.

I'll be sharing further snippets from the Summit in coming posts. Meanwhile, I'm off to find me a beignet.