Mutual Funds and ERISA: Watch for the Signs of Greed

Manhattan, NYThe recent settlement in the New York Life Insurance Co. (NYL) with regard to the alleged mismanagement of pension funds, aptly illustrates what can sometimes happen when investors aren't paying strict attention.

You'll want to, given that your retirement nest egg could be at stake.

In a previous era (and not that long ago), workers paid into a vested retirement plan through their employer in a more traditional pension model. However, with the industry evolving en masse to the 401(k), there's a bit more risk that goes along with the chance to earn substantial sums, should the plan be managed properly, and prudently.
Like any good investment, you want to maximize returns, minimize risk and mitigate any chance for an employer putting its own best interests ahead of their employees.

That's what happened with the NYL case, after the company was accused of investing its various employee plans almost exclusively into NYL mutual funds in an effort to boost profits and help to increase the perceived value of the funds to investors. And then there are the various fees, which allegedly amounted to millions of dollars. The class action lawsuit, which was finally settled earlier this month with a $14 million award, alleged that such fees were not only avoidable, but were self-serving in that NYL was the one profiting from those investments, thanks to the related fees.

The alleged misdeeds were seen as a breach of the Employee Income Security Act (ERISA) of 1974 as amended.

With the majority of retirement planning now flowing through 401(k) plans, it's prudent to avoid this kind of self-serving activity for a number of reasons—not the least of which is the danger of having all of your eggs in one basket. Having your 401(k) invested almost exclusively in your employer's mutual funds or stocks is all well and good. However, should the corporation fail, or fall on hard times for any other reason, the investor is up the proverbial creek.

It's self-serving for the employer, and perilous for the investor. Certainly not a prudent form of investing.

Another situation that could trigger an ERISA claim is if a plan manager invests in, or leaves the investment in poorly performing mutual funds. While the loss of value may not be as large as it might were company stock involved, the fact remains losses can, and have occurred, and are exacerbated if the fund is substantially large. Coupled with the fees which some funds command, such under-performance could serve as a double-whammy negative hit for the investor.

Inappropriate relationships that fund managers or administrators might have with individuals tied to investment products are yet another no-no investors need to watch out for. Under ERISA guidelines, 401(k) plan managers are charged with the responsibility of keeping your best interest at heart when investing prudently on your behalf. Thus, if a manager is investing plan assets into any product or vehicle that proves questionable because a) there is a kickback involved, or b) there is a friendship involved which drives the investment regardless of its validity, a breach in ERISA may have occurred.

Any company or corporation undertaking 401(k) plans have to manage them properly, and there are certain guidelines and protocols that will not only aid in the prudent management of Plan assets, but will also help prevent the train from going off the rails.

There are things the investor needs to watch out for. A proper procedure for monitoring investments in the 401(k) should be in place, together with a clear trail as to who is responsible for doing what.

Monitoring procedures should include a fiduciary committee holding periodic meetings about investments, and creating detailed minutes of those meetings.

Whomever is charged with the responsibility of appointing the fiduciary committee, also has the duty to monitor it, and the committee itself should be reporting up the chain on an annual basis.

Beyond that, the single most important thing a company can do to ensure prudent management of a 401(k) plan is to hire a qualified expert to advise about plan investments.

Such an advisor should be responsible for creating reports about investment performance, monitoring changes in fund managers and assessing mutual fund fees in comparison to other similar funds. This should be thoroughly documented.

Plan fiduciaries should also have sufficient insurance to cover 401(k) losses should they occur.

Such an organization is not only prudent, it also helps to avoid the potential pitfalls and self-serving interests of those who might put the corporation, or perhaps even his own well being, ahead of your own.

If such safeguards don't appear to be at play, start asking questions and keep your eyes open. Any breach in ERISA fiduciary duty with regard to mutual funds and 401(k) plans could result in a claim to compensate for a loss, or damages.