EP-107 RETHINKING "FIDUCIARY" OVERSIGHT OF INVESTMENTS with JAMES WATKINS

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Occasionally we get a court case that has ripple effects across the fiduciary, asset management and investment management industries.

In this episode, we’re going to look at the Potentially massive implications of the recent Supreme Court case, Hughes vs Northwestern

The original issue before the Court was whether or not the 403(B) plan participants had properly plead their case in their complaint.

The lower courts had dismissed the case, relying on a concept known as the “menu of options” defense.

The basic argument of the “menu of options” defense has been that plans satisfy their fiduciary duties under ERISA as long they offered a mixture of investment options– even if some of those investment options would be considered imprudent under applicable legal standards.

In a unanimous 8-0 vote, the Court rejected the “menu of options” defense.

The implications of this case could be far-reaching and include investment fiduciaries of all stripes including trustees and potentially RIA’s and other wealth management firms.

To help us understand the case and its impact on ERISA matters and the fiduciary landscape in general, I’m going to speak to JAMES WATKINS.

Jim provides all manner of fiduciary counsel-

He is a Certified Financial Planner® professional, owns the Watkins Law Firm out of Georgia, and has been an attorney since 1981.

His career also includes serving as a compliance officer with several national brokerage firms and as the director of financial planning quality assurance for the advisory division of an international insurance corporation.

Finally, he is the creator of the Active Management Value Ratio™, a metric that allows investors, investment fiduciaries and attorneys to quickly and easi!y calculate the prudence of actively-managed mutual funds.

OUTLINE

What are the fiduciary responsibilities of the providers of a fiduciary plan?
This falls within ERISA . . . help us understand that
- Codification of Restatement of Trusts
What was at issue in Hughes vs. Northwestern?
What happens going forward in this case?
With this ruling, there will be a big increase in scrutiny in the stewardship of these plans- what does this look like?
- Increase in cases (401K and 403B)- against 401K and 403B and BY plans vs advisers. (404A each investment must be prudent)
- Increase in discovery (and other issues like kickbacks?)
- Increase in costs for plans? Fewer providers? E&O Coverage +++
  - Reduce cost of plan
  - Reduce options
  - Monitor plan
- A change in the way investments and stewardship are analyzed and deemed appropriate?
  - Menu doesn’t work anymore
  - Proof of a manager selection process?
  - A new Cost/benefit analysis? (Actively Managed Value Ratio)
  - Who could be liable? Plan Trustees? Investment Consultants? others?
How could this spill over into other areas?
- Restatement 3rd
  - Sec. 90 Prudent Investor Rule
    - Diversification
    - Cost-Efficiency
- Case Law (Tibble et al . . . )
- Other trustees / fiduciaries?
  - Personal trusts
  - Investment fiduciaries
  - Foundations
- Active vs Passive (Proliferation of cost benefit analysis- AMVR?)
- Investment consultants giving opinion letters?
- Private Investments?
- Intersection with SEC, FINRA other regulatory bodies? Prudent Investor Rule?