Attached to this newsletter is an article that Fred Reish, Bruce Ashton and Stephanie Bennett wrote for the Journal of Pension Benefits on the “Duty to Remove Investments.”
While it is generally accepted that plan sponsors and fiduciaries have a duty to prudently monitor (and remove, when necessary) investment options from 401(k) plans, little has been written about the legal underpinnings of that duty. Further, some courts (including the federal trial court in the DeFelice v. US Airways Inc., which is mentioned in the article) have challenged the duty to monitor each individual investment option, so long as a wide range of alternatives is offered to the participants. Those courts reached the wrong decision. As a result, they have unfortunately muddied the waters of fiduciary responsibility.
Fortunately, though, the U.S. Court of Appeals in the DeFelice case corrected the erroneous conclusions of the trial court. The Court of Appeals made it clear that, for 404(c) participant-directed 401(k) plans, the fiduciaries are legally responsible—-and potentially liability-—for losses attributable to any investments that are imprudently included in a 401(k) plan.
Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.