INDEPENDENT FIDUCIARIES IN THE POST- DUDENHOEFFER WORLD

Transcription

1 HEALTH WEALTH CAREER INDEPENDENT FIDUCIARIES IN THE POST- DUDENHOEFFER WORLD

2 As a result of a June 2014 US Supreme Court ruling, Employee Stock Ownership Plan (ESOP) fiduciaries face new considerations and legal risks. Mercer Sentinel considers the ramifications of the ruling and offers recommendations for Investment Consultants and their clients. BACKGROUND The Supreme Court s decision in Fifth Third Bancorp v. Dudenhoeffer 1 (Dudenhoeffer) set aside nearly 20 years of legal precedence in so-called stock-drop lawsuits against ESOP fiduciaries under the Employee Retirement Income Security Act (ERISA). Previous courts had followed a presumption of prudence which offered ESOP fiduciaries some protection against lawsuits following sharp declines in company stock held within Defined Contribution (DC) plans. The Dudenhoeffer ruling rejected the presumption of prudence, and asserted that ESOP fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general... RISK It has been reported that the Dudenhoeffer ruling potentially lowers the legal hurdle for plaintiffs to be successful in stock-drop lawsuits. ERISA provides DC participants with several avenues for legal remedy in stock-drop cases, including holding fiduciaries personally liable for breach of fiduciary duty. Therefore, it is critical for fiduciaries to understand the evolving legal environment when serving as an ESOP fiduciary. RECOMMENDATION In light of Dudenhoeffer, fiduciaries should take extra care to evaluate the prudence of corporate stock holdings, buy/sell decisions, and potential conflicts of interest associated with company stock holdings in ESOPs and DC plans, especially if in possession of material, non-public information. Employing an Independent Fiduciary can help mitigate personal and organizational risks, particularly those arising from the potential conflict between company, management, and plan participants interests. Mercer Sentinel has researched numerous Independent Fiduciary providers and can help answer client questions and provide guidance on Independent Fiduciary selection. For further information, please contact: Freeman Wood (312) freeman.wood@mercer.com Paul Sachs (215) paul.sachs@mercer.com 1 Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct (2014)

3 INDEPENDENTFIDUCIARY FIRMS: RANGE OF SERVICES A primary reason for hiring an Independent Fiduciary is to mitigate various conflicts of interest between company management, plan fiduciaries, and plan participants. In Mercer s view, a fully independent fiduciary is well positioned to mitigate conflicts and litigation risk. When contracting, independent fiduciary firms have differing expertise and can accept mandates that include varying degrees of autonomy, so costs and duties will vary based on the services provided and the amount of independence required of the fiduciary. An investment management/directed trustee (IM/DT) engagement may not be sufficient to alleviate the potential risks faced by ESOP fiduciaries, as the IM/DT looks to the plan/plan board for direction on key issues. Fiduciary mandates can also vary: they may involve exiting company stock if the option is being terminated, managing the ongoing company stock option, or implementing adjustments associated with new investment limits imposed by policy changes. Within these different mandates, the various firms may agree to varying levels of responsibility, for example, in developing participant communications. The table below summarizes our assessment of the different service levels and responsibilities between IM/DTs and Independent Fiduciaries. It is important to note that each provider and engagement is unique, so service levels can vary widely. Roles/Responsibilities Inv. Manager & Directed Trustee Independent Fiduciary Monitor trading impact and costs Yes Yes Manage liquidity for participant withdrawals Yes Yes Liquidation of spin-off holdings Yes Yes Decide whether to buy / hold / sell liquidity stock Yes Yes Ensure ESOP complies with ERISA requirements May / May not Yes Draft plan participant communication No Yes Proxy voting In line with plan Independent Monitoring of sponsor company s financial position No Yes Comparison Points Reduce personal and corporate liability* No Yes Alleviate potential conflicts of interest* No Yes * This table is for illustrative purposes and represents our assessment of general industry business practices.

4 MERCER SENTINEL SERVICES Mercer Sentinel is a specialized team within Mercer Investment Consulting, Inc. that focuses on the governance and implementation of investment operations, including consulting on Independent Fiduciary searches. The team was created in 1999 to assist institutional clients with assessing and monitoring their key investment service provider relationships. Our approach provides clients access to a combination of extensive industry knowledge, direct operational experience, deep resource base, and research driven methodology. We believe our largest key differentiators are our specialist teams and deep industry knowledge. Mercer Sentinel works with clients to help them define their Independent Fiduciary needs and the mandate they are seeking to fulfill. Mercer Sentinel will: Work with clients to define their needs, the scope of their mandate, and the responsibilities they want an Independent Fiduciary to assume, Formulate a short-list of Independent Fiduciary service providers, based on client needs, our industry knowledge, and our research on Independent Fiduciary firms, Recommend and agree potential candidates, Create and issue a customized request for proposal (RFP), Obtain, investigate, and evaluate/compare the RFP respondents capabilities, offered services, and costs proposed, Analyze RFP responses and interview candidates, Provide a written recommendation for an Independent Fiduciary selection, and Hold summary phone calls or in-person meeting with the plan fiduciaries to discuss our findings. Independent Fiduciary search projects typically take 8 to 12 weeks, depending upon the scope and complexity of the mandate. The most common project mandates include:. Sunset assignments For clients phasing out their company stock option Go-forward options Clients seeking fiduciaries for permanent assignments Fundamental assignments that include: monitoring, communications, investment suitability review, corporate actions, and proxy voting. Introducing holding limits In these assignments, the introduction of new limits means the Independent Fiduciary may need to sell/reduce holdings for individual plan participants to comply with the new policy guidelines..

5 Important Notices References to Mercer shall be construed to include Mercer LLC and/or its associated companies Mercer LLC. All rights reserved. This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity without Mercer's prior written permission. The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results. Mercer's ratings do not constitute individualized investment advice. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Information contained herein has been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission or inaccuracy in the data supplied by any third party. Investment advisory services provided by Mercer Investment Consulting, Inc.