Invesco employees had better and worse choices among investment options. But those options were almost exclusively Invesco affiliated funds. There were also more than a hundred of them. The class action lawsuit has been brought on behalf of several thousand participants in a plan with more than $890 million in assets, one of the largest in the country.
These are big numbers for a relatively small slice of the economy. Not everyone works for an investment manager. The case resonates, however, with other schemes that involve inducements for employees to invest in the success of their own employers. Cui bono? Who benefits?
ERISA’s Exclusive Interest and Prudence Standards
ERISA requires that plan fiduciaries “discharge their duties solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries and defray reasonable expenses of administering the plan.” The Supreme Court has focused particularly on the importance of the word “solely” in the statute, noting that it should be understood to exclude all selfish interests.
In addition, the law requires that fiduciaries act with the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use. It is a prudent expert standard. Fiduciaries must continue to monitor the investment options originally selected to ensure that they remain prudent over time. This is not an “over and done” situation.
Although the two legal standards are sometimes discussed separately, they apply to real facts in ways that overlap and intermingle.
The Complaint notes that, from 2012 to 2016 between 93 and 95 percent of the investment options offered by the Plan were managed by, or otherwise affiliated with, Invesco. The Plan offered between 155 and 205 investment options, more than 10 times the average number of choices in most 401(k) plans. Some of those investment choices appear to have consistently underperformed as compared to similar funds handled by other managers.
Investment managers make money, of course, by charging fees to investors. Many large retirement plans, like Invesco’s 401(k) plan, leverage size to bargain for lower management fees. The Invesco plan made no such effort. This was in spite of the fact that, for example, in 2017, 65 percent of Invesco’s ETF portfolio was comprised of plan assets.
Invesco benefitted greatly from managing employee money. There was no incentive for the plan to bargain, since it was effectively paying itself. The employees lost money on the deal since the fees were deducted from their account balances. They might have gotten a better deal elsewhere.
Finally, even if the management fees had been low and the investment returns spectacular, it would be hard to argue that investing in funds managed by one’s own employer is an example of prudent financial diversification. An employee who gets a salary and perhaps a sales commission for pushing the employer’s financial products and who then invests his or her retirement savings in those same products has a lot of exposure. For plan fiduciaries to steer employees into that behavior looks bad. If it walks and quacks like a breach of fiduciary duty….you know the rest.
Too Many Investment Choices
The Complaint launches two interesting pre-emptive strikes against Invesco’s likely defense that the sheer number of investment choices created diversification.
The first is based on the theory that too many choices create “decision paralysis.” Anyone who has been to a well-stocked grocery store to buy salsa will recognize the phenomenon. Too many investment options, the argument goes, will ultimately produce confusion and poorly informed consumer decisions –fleeing from the store with a jar of something red, anything, not necessarily remotely what you came for. Quantity is not quality.
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Shaky Investment Performance
The final argument advanced on behalf of plan participants was that certain investment options performed poorly. This is always the hardest argument to make in a breach of fiduciary duty lawsuit. It’s largely statistical. The Complaint makes an extended and plausible case, sure to be met in kind
But the greatest strength of the argument lies in the wider application to any retirement plan that offers employer stock as a retirement plan investment option. Is this good for employees? Do they benefit? The answer is complicated, depending on the stock, the role it plays in incentivizing performance and the integrity of plan fiduciaries.