FROZEN: A good movie -- Maybe not a good plan investment strategy
One of the dilemmas faced by ERISA fiduciaries is how to handle an underperforming fund in the plan’s investment line up. Many times the underperforming fund has a number of participants in it. The plan’s fiduciaries may be reluctant to eliminate an option some people found attractive in the past. In addition, there is the administrative hassle of informing participants, issuing notices, instituting blackout periods and transferring people to the new option that they may not like as well.
Sometimes fiduciaries take the path of least resistance and simply freeze that option. Participants who are currently in it can stay in it but no new money goes in. The idea is that participants who like the fund will be happy and fiduciaries are protected because it is the participant’s decision to stay in it.
But, after the recent Supreme Court decision in Tibble v. Edison that may not be the best choice any more. In language that is not a binding legal precedent, the Supreme Court indicated an ERISA fiduciary has a duty to “monitor investments and remove imprudent ones.” This would suggest that if the investment is not prudent enough for “new” money it is not prudent enough for “old” money. The implication is ERISA fiduciaries should not try to split the difference but should completely remove investment funds they deem imprudent.
If your plans have frozen investment options, it may be time to revisit what to do with them. Some investments have been frozen because there is a surrender charge to get out of them. It may be prudent for those funds to let them stay frozen until the charge is gone. But for underperforming investments without a withdrawal penalty, fiduciaries might be best advised to make the tough decision and unthaw them and move the funds to more appropriate choices.
Sometimes fiduciaries take the path of least resistance and simply freeze that option. Participants who are currently in it can stay in it but no new money goes in. The idea is that participants who like the fund will be happy and fiduciaries are protected because it is the participant’s decision to stay in it.
But, after the recent Supreme Court decision in Tibble v. Edison that may not be the best choice any more. In language that is not a binding legal precedent, the Supreme Court indicated an ERISA fiduciary has a duty to “monitor investments and remove imprudent ones.” This would suggest that if the investment is not prudent enough for “new” money it is not prudent enough for “old” money. The implication is ERISA fiduciaries should not try to split the difference but should completely remove investment funds they deem imprudent.
If your plans have frozen investment options, it may be time to revisit what to do with them. Some investments have been frozen because there is a surrender charge to get out of them. It may be prudent for those funds to let them stay frozen until the charge is gone. But for underperforming investments without a withdrawal penalty, fiduciaries might be best advised to make the tough decision and unthaw them and move the funds to more appropriate choices.
