Stable Value Fiduciary Responsibilities

ERISA Review: Who is a fiduciary? Under ERISA a fiduciary is anyone who: exercises any discretionary authority or control over a plan’s management; exercises any authority or control over the management or disposition of the plan’s assets; renders investment advice for a fee or other compensation with respect to plan funds or property; or has any discretionary authority or responsibility in the plan’s administration. The test for determining fiduciary status is a functional one: if a person or entity has or may exercise any of the functions described above, that person or entity will be deemed a fiduciary. The definition is so broad that realistically anyone who is reading this article is probably a plan fiduciary.

Under the exclusive benefit rule of ERISA, fiduciaries must discharge their plan duties solely in the interests

of plan participants and beneficiaries and for the exclusive purpose of providing benefits to plan participants and beneficiaries and defraying the reasonable expenses of administering the plan. Fiduciaries are held to a high standard under ERISA. The fiduciary must discharge their duties with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of a similar enterprise.

Increasingly we are encountering plan sponsors (fiduciaries) who are recognizing that they may not have been paying as much attention to their stable value funds as they have to their plan’s other investment options. The equity markets have produced such strong results for so long that these options have attracted a lot of attention from participants and consequently from plan administrators. However, retirees and older participants approaching retirement understandably find stable value attractive because of the low volatility and generally attractive returns. In addition, even younger employees are using stable value in their asset allocation strategies instead of money market and bond investment options since the returns of stable value funds are better. In addition, the absence of price volatility in stable value funds moderates the renewed volatility of common stock investments.

Although an ongoing process, renewed awareness of the advantages of stable value funds in completing the spectrum of investment options for participants should become the focus for plan sponsors in the near term. Performance, tracking efficiency, diversification and quality are among the items to include in any review of the stable value fund, as noted below.

Performance: Plan fiduciaries are recognizing that performance differences between stable value managers are significant with the #1 pooled fund generating a 12-month return of 7.26% as compared with only 5.32% for the lowest performing pooled fund reported in IOMA’s December 30, 1998 issue of DC PLAN INVESTING. Even over five years the differences can be striking with the best performing manager in the Nelson’s universe returning 6.74% on an annualized basis vs. 5.80% for the worst performing manager. If we assumed the same returns over 10 years, a 55 year old participant with a $100,000 account balance, contributing $500 per month, would end up with nearly $22,000 more in retirement savings at age 65 investing with the first manager versus the second.

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