Bear with me while I connect a loose thread between my research interests and the BLPB readership's broader interests and talk about the legal status of plan advisors to investment accounts (think 401k).  More so than with a traditional benefits plan (think pension) fiduciaries and their corresponding duties raise difficult questions in the context of self-directed retirement accounts (again, think 401k). Standing  between employee/beneficiary and the investment assets are a myriad of third parties servicing the plan– like the employer sponsor, the plan administrator, the record keeper, the plan advisor, the organizational machines of the individual funds listed in the plans.  Each of these parties touch the assets in some way and effect the outcome of the investment at least in some respect.  Not all of these third parties, however, are fiduciaries under ERISA and even those that are, often owe diluted fiduciary duties to beneficiaries due to the "self-direction" that you and I exercise over our retirement accounts by allocating between stocks and bonds or target date funds when we were hired, or annually for those of us that actively monitor our accounts.  (For those ERISA folks out there, forgive this over simplification).

A big legal issue in the world of ERISA and mutual funds (because the two overlap in the context of retirement investing) is liability for fees charged to these accounts. The 2010 Supreme Court case in Jones v. Harris and the pending case Tibble v. Edison Int'l illustrate how big and unsettled these questions are.  

Fees matter because they affect your total return on your investment, and more so than a fund's past performance, serve as a predictor of how your future investment will fare.  Fiduciary status matters because it helps answer who, if anyone, is response for the fees charged to investors, particularly in the 401k context. 

For service providers to plan, their fiduciary status turns on the functional fiduciary test (as opposed to the named fiduciary like would be the case with the employer sponsor) under ERISA 3(21)(A).  This fact-intensive test requires the service provider have discretionary authority or control over the management of the assets or discretionary responsibility over the administration AND, as the recent cases have played out that the service provider actually exercise that discretion. 

Mass Mutual and ING were recently found to be functional fiduciaries, whereas Morgan Stanley and American United Life Insurance were not (see this summary of recent fee litigation cases).  While it isn't clear where the legal doctrine will eventually be settled, it is safe to say that this is a big issue in the investment and consumer advocacy circles.  A tremendous pool of capital stands to be effected, one way or another by the outcome of this debate.

In the meantime, Mass Mutual settled it's excessive fee litigation lawsuit on Friday, October 31st. As a part of the settlement, Mass Mutual agreed to change several business practices for plan sponsors including greater transparency about the actual expense ratio charged, the different class of investment shares, and fee sharaing arrangements. (See the "Changes to Defendants' Practices and Revisions to the Contracting and Disclosure Documents" section of the settlement agreement begining on page 24).  These settlement terms get to the heart of the fee transaparancy/competition debate in the mutual fund arena (the Seventh Circuit opinon/dissent in Jones is a great recap of this debate).  

Aside from how this may affect your personal retirement account or intersect with your interests in mutual funds, because of the amount of capital in these accounts, the evolving law regarding fees, fiduciaries and duties owed to retirement investors will also impact public operating companies. In other words, this is an area of the law to watch–some exciting stuff is on the horizon.

-Anne Tucker