Pricey Investments, Poor Outcomes
All I can think of is the cliche from Casablanca: I am shocked, shocked. The whole story, if you don’t want to use up one of your free articles on the NY Times website, is summed up on the front page of the website and the paper today:
Pensions Find Riskier Funds Fail to Pay Off
By JULIE CRESWELL
Pension funds that have increased expensive investments in private equity, real estate and hedge funds have been outperformed by stocks and bonds in the last five years.
Think about that. The article is about public pension plans, but probably only because of the size, relative ease of access to information, and public impact. What if we assume though, as is likely the case, that the story holds true across the private sector as well? What would that mean for the named fiduciaries of those plans, who were responsible for operating the pensions like a prudent expert? They would have clearly paid more than was necessary to invest a plan’s assets, depressing returns and reducing the asset base, raising real questions of whether they lived up to this standard.
If that is the case, did they take steps to protect themselves, and by extension the plan participants, from this outcome, at the time they pursued these investments? For instance, did they make sure that the advisors who put them into those investments were also fiduciaries? Did they have them sign on the bottom line expressly as fiduciaries? If not, did the advisors act as one or instead sufficiently insulate themselves from that status? If they are not fiduciaries, then they are unlikely to be the targets (or at least not successful targets) of breach of fiduciary duty suits over the effect on pension plans of these investment strategies, leaving only the named fiduciaries (and any others at the sponsor who acted as functional fiduciaries) as likely targets for such suits.
If the advisors were not fiduciaries, then what did the named fiduciaries do to protect themselves and the plan participants from this type of an outcome from the investment advice that they were being given? Did the management agreements they reached with the advisors who put them into these investments give the named fiduciaries a contractual ability to hold them accountable and, if so, are they going to do so? If the answer to either of those questions is no, the named fiduciaries may be the ones left holding the bag, as the ones responsible for the error, if breach of fiduciary duty lawsuits are pressed over this outcome.
You know it’s a funny thing, in a way. Investors always talk about an exit strategy – maybe fiduciaries, at the time of investment decisions, ought to be looking ahead as to what their exit strategy is going to be if the investment is a dud, and who is going to be responsible for that outcome. In my mind, if ERISA’s fiduciary duties themselves don’t impose an obligation of this nature on the named fiduciary (and perhaps they do), simple self-preservation alone ought to invoke that approach.