Res Ipsa Loquitur: Ethical Considerations By: Gabriel PotterMBA, AIFA®

It is important to recognize that the principles of fiduciary responsibility originate from ethical guidelines as well as legal outcomes. The responsibilities to fiduciaries both ethically and legally undergo constant refinement. Many of the significant modifications are due to judicial verdicts handed down by the courts. Fiduciaries and their advisors should make it a part of their process to stay informed about challenges to fiduciary duty, so they may appreciate their legal obligations.

The Case: Bidwell vs. University Medical Center 

A recent case, Bidwell vs. University Medical Center, details the obligations of disclosure on investment lineups, particularly qualified default investment alternatives (QDIAs) for defined contribution plans. 

Here’s what happened: The University Medical Center selected a conservative stable value fund to be their default fund. If plan participants did not make any choices for their retirement plan, they were defaulted into the stable value option. However, participants could also choose to actively invest their assets into the same stable value fund. This is what appears to have started the confusion. 

At some point, University Medical Center changed their default fund and elected the safe harbor provisions under a QDIA. The plan chose to transfer all of the assets of the original default (the stable value fund) to the new QDIA (in this case, a life cycle fund). Moving the assets may have been explicitly allowed for those participants that were swept into the plan’s orginal default fund, but not with regard to those participants who specifically elected to invest their assets in the stable value fund. Those participants found their assets moved to the new QDIA—the life cycle fund—contrary to those participants’ intentional investment choice. 

University Medical Center mailed a single notice to participants to inform them about the change. The plaintiffs charged that this single notice was insufficient and, therefore, a breach in fiduciary duty. They argued that University Medical Center had to prove actual receipt of the mailed notices; indeed, many plaintiffs claimed never to have received the notice. 

The Verdict 

The US District Court ruled in favor of the defendants, including University Medical Center and noted that neither the defendants, nor the recordkeeper were liable for a breach of fiduciary duty.

Recommendations for Plan Sponsors 

There are two key takeaways for a plan sponsor from this case: 

First, the legal challenge might have been weaker if the client had made a greater effort to contact the plan’s participants. Although the defendants ultimately prevailed, the original cost in all probability would have been minimal had a more elaborate notification procedure been taken by University Medical Center, including sending the information in multiple notices, both physical mailings and electronic. 

Second, in an ideal world, plan sponsors work closely with their recordkeepers to make sure services provided are sufficient for their plan participants. However, we do not live in an ideal world. In the aforementioned case, a different recordkeeper with greater sophistication may have had the ability to track the source of the inflows and distinguish if the original purchases were selected by participants or default investments. Furthermore, the suit between the plan participants and University Medical Center might have been avoided entirely if the recordkeepers had differentiated between defaulted participation and those participants who had elected to invest their money in those particular funds. Making that distinction and mapping the assets accordingly could have prevented this case from reaching the courts and minimized the risks for University Medical Center. 

Recognizing the relationship between the principles of fiduciary responsibility, ethical considerations and legal rulings illustrates the importance of considering what’s legal and what’s ethical inherent in the process. It’s a valid question every company should take into account— balancing what’s in the best interest of the corporation and what meets the fiduciary duty owed to the employees as they save for their retirement futures. This can lead to a better practice which manages both risk and responsibility for participants in the process.

 
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,...

More about Gabriel Potter
Sign up for our Newsletter

More Articles From This Issue

Sign up for our Newsletter