A couple of decades ago, I attended an ERISA litigation conference where one of the topics of discussion was the potential for lawsuits from participants who were placed in stable value (then known as "fixed funds") investment funds in a 401(k) plan, who would claim somehow that it was a fiduciary obligation to optimize gains in such plans. I scoffed at those comments then, as I do now.
I bought my first shares of stock when I was 16, using $300 of savings from my Detroit News paper route collections to buy into Continental Telephone, American Airlines and Georgia Pacific. I had studied these (and other) companies under the tutelage of my stepfather, a civil servant in Wayne County, whose passion was the stock market. At that time, Merrill Lynch had a broker in its Downtown Detroit office which specialized in small, odd lot sales. And yes, I ordered delivery of the stock certificates, and enrolled in those companies' dividend reinvestment programs. Ahh, the days of Lou Rukeyser and Wall Street Week.
It is this long familiarity with the equity market which had caused me to challenge the wisdom of the QDIA regs when they were first proposed. Though I very much understand those who are concerned about the importance of smart investing in retirement plans, I remember more than one conversation with Ann Combs about the concerns I had about a default fund being equity based. Markets do go down, and employees tend to trade investments in defined contribution plans at inopportune moments. As I've noted in a past blog, ERISA Section 404 demands that the funds be invested in such a way to minimize the risk of large losses, not to optimize gains for adequate retirement. Optimization may be a laudable public policy position, but a fiduciary standard it is not.
Even today, I advise clients about the downside of choosing an equity based investment as a default. I actually don't think the QDIA, as currently designed, is necessarily prudent. But for the QDIA reg granting relief, choosing a default investment fund based on equities could cause fiduciaries some exposure. And even though an employer may have a legal defense to the participant losing money on a default fund because of the QDIA rules, it is the employer, not the regulators, who have to deal with the bitter employee who has lost funds under such an election. It may be legally defensible, but it isn't necessarily right-or the right thing for participants.
So finally we have the Bidwell case, involving a platform I helped design. An employer changed its default fund from a insurance guaranteed account type of fund to an equity based QDIA just as the market was entering into the Great Recession's downturn. Those participants who's funds were moved lost substantial value. They sued, but the employer prevailed. In that the employer had complied with all of the particulars of the QDIA rules, there was no fiduciary breach, and the employer was not held liable for those losses.
Though we legally applaud the ruling, and the affirming status it gives to the QDIA regs, there really are a couple of "darker side" takeaways from this case: if you are doing a QDIA, make sure you are doing it right. Otherwise, there may be exposure, as there is nothing inherently prudent about target date or lifecycle funds as a default investment fund. The second is to not discount the thought that "prudence" as a standard still applies to other default investments, and that the QDIA may actually be putting participants at a disadvantage.
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