Experts Rule - ERISA Prudence and Chevrolet Corvettes

ERISA Gets It Right

Historically, for all of ERISA's vilification for often being cumbersome and counterintuitive, there's been at least one area in which the statute's been lauded. That's the set of general fiduciary rules, including their (i) use of a modern portfolio theory that looks at investments in the context of the full basket of investments, and (ii) disdain for an approved list of investments and, rather, the adoption of a deferential approach to responsible nonconflicted plan fiduciaries.

In this latter regard, ERISA uses a construct under which a responsible fiduciary is identified by the statute, and then trusted, where there is no conflict of interest, so long as the fiduciary proceeded with an appropriate educational base and with procedural care - proceeded as a "prudent expert," to turn the phrase. This deference to the responsible expert makes sense. Why would a lawyer, regulator or judge know better than the educated responsible expert (again, assuming no conflict), using due care, what investments should, as a matter of substance, be made?

Second-Guessing ERISA

Lately, it seems, this solid approach seems to be coming under some fire. In Congress, a bill was introduced by Sen. Lieberman that actually would have limited a plan's ability to make certain energy and other commodity investments. Putting aside completely the oddity, from a plan-management perspective, of singling out that particular types of investment as proscribed, when virtually every other general type of investment is not per so barred, the bill if enacted would set the absolutely awful precedent of opening the door to (and indeed adopting a statutory framework) for the future inclusion of other supposedly malevolent types of prohibited investments, depending on the way in which political winds happen to be blowing from time to time. While the proposed micromanagement did not pass, it remains to be seen whether the final chapter of the story's yet been written.

To me, yet another example of a trend towards distrust of the fiduciary and the discouragement of types of investments manifests itself in the willingness of some to conclude that valuation issues for hard-to-value assets might act as gateway issues regarding whether, as a matter of prudence, investments can be made (or held). In effect, the thinking seems to be that a fiduciary should be absolutely prevented from making investments where valuation issues cannot be solved. The question ultimately is whether statutory valuation requirements essentially convert to superfactors in the prudence analysis. I would like to think not.

The DOL Gets It Right

So kudos to Bradford Campbell for his recent comments on investments in hedge funds and private equity in connection with the issuance of a GAO report ("Defined Benefit Pension Plans: Guidance Needed to Better Inform Plans of the Challenges and Risks of Investing in Hedge Funds and Private Equity" (GAO-08-692)) calling for additional federal oversight. The report was seized upon in politicized comments from the soapbox by certain Congressman.

By way of background, as reported in the September 11, 2008 BNA Pension & Benefits Daily, the GAO and some congressmen, who may not all completely "get it," were lobbying the DOL to take a more active role in plan investment in hedge funds and private equity. It's almost as though a bunch of people who are not investment experts are saying, "I don't like those investments, anyway, so who cares?" But that's such a dangerous perspective - the last thing we should be doing is bending the investment of the biggest lump of money in the world (as the 1985 NBC White Paper referred to it) towards whatever nonsophisticated investments with which the nonexperts can find their way to get comfortable. Sure, we can find situations in which we all would have preferred that different choices had been made (can ya say, "Orange County"?), but what's the alternative? Should everything be required to be conservative? And, if so, what's "conservative"? ERISA's general principles are all about not going down such a road.

As much as some are understandably concerned about leaving fiduciaries, who may not always be quite as smart as they're supposed to be, to their own devices, what's the better choice? Giving the investment choices to Sen. Lieberman, . . . to Brad Campbell, . . . to me? Be careful what you wish for; when you have someone with whom you agree substituting judgment for that of a responsible fiduciary, be ready for where things will go when you disagree.

It fell upon Campbell to react to the oh-so-dramatic calls for additional oversight. He frankly has not been my favorite DOL rock star in light of his apparent role in what to me is a reactive and undue expansion in the 5500/408(b)(2) process regarding supposed indirect plan relationships, despite questionable analytical underpinnings.

Rather than taking the easy way out and uttering platitudes about protecting plan participants and beneficiaries and decrying supposedly unthinking plan fiduciaries, Campbell responded (his comments are included with the GAO report): "With respect to any plan investment, including an investment in a hedge fund or private equity fund, a plan fiduciary must gather sufficient information to understand the nature of the investment, make a determination as to its prudence, and periodically monitor the investment to evaluate whether it remains a prudent investment." Thus, he reinforces that the general idea is that the responsibility rests with the responsible expert. He then noted that among the challenges to issuing guidance in this area are a lack of a statutory definition of hedge or equity funds, as well as a great variance of objectives and strategies for the funds. I think that the approach translates to, "What the heck is the basis on which you would have the DOL regulate this particular type of investment?" Good. (He also indicated he'd look into the matter a bit more. Fine.)

Campbell's approach is a positive one for everyone. Like it or not in any particular case, ERISA gets it right when it set out to require that educated nonconflicted fiduciaries be responsible for plan investment, and then holds them liable when they don't do their jobs. I think, here, Campbell was right on the button.

Chevrolet Also Gets It Right

As further proof that the expert judgment is worthy of deference, look at what they're saying about the new Z06 'Vette. Here's a car that goes 0-60 is 3.4 seconds (!!!) and outperforms cars materially more expensive. "Shock and awe" was the design directive, and the directive seems to have been followed. Look what "they" are saying in the various October 2008 issues. Motor Trend calls this "awesome" creation "the best Corvette . . . ever." Road & Track talks about a 'Vette that's been "unleashed" and issues a "warning to owners of other supercars." Car and Driver talks about "a ride nobody will forget." Automobile magazine was "blown away" in its October 2008 issue. For the long-time Corvette enthusiast, this newest incarnation (no pun intended) is quite a nice payoff. Of course, before I place too much credence in the experts' judgment, I would caution that any determination that the 'Vette is under the mark would have needed to be dismissed out of hand. But, of course, that's simply because, unlike a lawyer, regulator or judge in the context of reviewing the substance of a plan investment - who is in no position to know better than the nonconflicted fiduciary what's better for a plan - I am indeed in a position to know that (while I admittedly do like the Countach a whole bunch), all things considered, good ol' fashion American ingenuity consistently produces the best two-seater in the world. So there!