Anthem Inc's Lawsuit: A Failure of Monitoring By: Gabriel PotterMBA, AIFA® 2016.01.11
401(k) plan sponsors are generally aware that there is a standard for selecting investments for the plan’s lineup.  When it exists, the investment policy statement offers guidance for investment committee members about what sort of investments are allowed (or required) in the plan, how the investments should compare relative to peers.  Similarly, the investment consultants who conduct investment manager searches typically offer sound criteria for narrowing their list of appropriate candidates. 

Put it all together, and you find that the investment selection process for most plans is well understood and generally goes on without incident.  What is fascinating to us is how often lawsuits hit plan sponsors and investment committees due to their failure of monitoring those investments:  revisiting them for fee competitiveness, taking advantage of new share classes or investment vehicles, documenting trade-offs between revenue sharing arrangements and direct plan payments in minutes, style drift from the investments’ original mandate. 

Case in point:  Anthem health insurance just got sued by their employees, not because their investment selections (Vanguard mutual funds) were poor, but because there were cheaper versions available of the same product.  Even low cost mutual funds, which Vanguard is known for, still managed to overcharge $18 million dollars in fees (from 2009 to 2013 according to the Wall Street Journal) to Anthem plan participants.

This lawsuit shouldn’t be a surprise.  There have been a lot of similar lawsuits including Tibble vs. Edison (which we devoted an entire Confero issue towards, Summer 2013 Confero TIbble v. Edison), Boeing, Lockheed Martin, and so on.  The message to investment plan committees could not be any clearer:  yes, you have a responsibility to choose investments, but you also have a duty to check they are living up to a prudent standard.  The trend of lawsuits suggests that it is this second piece – diligent monitoring – where investment committees are failing to protect themselves and their employees.

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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