Can a fiduciary of a pension plan or other employee retirement account trade in derivatives without breaching his fiduciary duty? If this article from the New York Times is to be believed, then the answer is really no. If there is no transparency to fees and costs of the undertaking, than, theoretically, a fiduciary cannot truthfully say whether or not the transaction is financially appropriate in light of its costs to the plan and whether the assets of the plan are in turn being handled properly. Further, a fiduciary’s obligations run more to the duty to investigate and properly handle a plan’s investments than it does to ensure the best outcome; it would not seem that a fiduciary can engage in the due diligence necessary to satisfy his, her or its duty of prudence if the fiduciary cannot obtain clear and accurate information about an investment opportunity, which the article suggests cannot be done as part of a derivative based investment.

Now on some levels this reads like a perfect law school exam hypothetical: here is a widely used investment in which there is no transparency as to costs and the like; now identify all of the ways in which investing in them would violate the fiduciary obligations of plan sponsors and others with regard to an ERISA governed retirement plan. At the same time, though, ERISA has to have some flexibility to allow the real world to be accounted for, and if derivatives may in some instances be an appropriate investment for a pension plan, fiduciaries should be allowed to make use of them, despite having access to only imperfect information. The question, from a fiduciary liability perspective, is where in the middle of those two extremes does fiduciary obligation, duty and breach lie? It unquestionably is somewhere in the middle, and if and when a retirement plan is sued for underperforming due to the use of derivatives, we may well find out exactly where in the middle that line rests.