Why the Complexity of Plan Valuation Argues Against Turning Appraisers into Fiduciaries by Regulatory Pronouncement
I have written before, both in short form on this blog and long form for the Journal of Pension Benefits, on my view that it is not necessary to alter the regulatory definition of fiduciary to transform appraisers into fiduciaries. Simply put, there are so many parties who already bear the title of fiduciary and are therefore legally responsible for the impact on a plan of a deficient appraisal that transforming appraisers into fiduciaries is likely to do little more – when it comes to plan performance and governance – than create another party to name as a defendant in ERISA litigation, namely the plan’s appraisers. Moving the risk of fiduciary liability for a poor appraisal from the fiduciaries who run the plan – and selected the appraiser and accepted the appraiser’s findings – to the appraiser itself is unlikely to change the incentives and disincentives that impact the quality of a plan’s appraisal; it will simply move some of those incentives and disincentives from those who operate the plan to the appraisers they hire, or else will simply multiply those same incentives and disincentives so they are borne both by those who run a plan and by the appraisers they hire.
When it comes to the general opposition by the appraisal industry to such a change, however, I have to admit that I nonetheless have generally assumed it to be basically an act of economic self-interest: taking on fiduciary risk will increase potential liabilities and thus, at a minimum, the industry’s overall insurance and legal costs. Dr. Susan Mangiero, one of my favorite experts on business valuation, however, has published an excellent article explaining the complexity of appraising and valuing the holdings of pension plans, which illustrates another component to the industry’s opposition to turning appraisers into fiduciaries; the appraisal process for a particular plan can be particularly complex, with significant judgment calls. At the end of the day in any particular case, an appraiser, if a fiduciary to a plan and thus a defendant in ERISA litigation, may be found to have acted prudently in making those calls and thus not liable as a fiduciary under ERISA. However, that broad range of judgment calls leaves plenty of room for litigation over each of those calls, making it an expensive and long process for an appraiser to reach that point of exoneration. I am not certain that imposing fiduciary risk on each one of those calls by an appraiser is really likely to improve the analysis provided to plan fiduciaries – it seems to me it is more likely to simply create a “CYA” mentality when making appraisal calls, with one eye on the risks those calls pose down the road in a courtroom. I don’t see how creating that dynamic, rather than a dynamic that increases the accuracy and thoughtfulness of the information provided to those who operate a plan, is really likely to improve plan performance.