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Are You Benchmarking Your Funds Correctly? The Tibble and Brotherston decisions established new benchmarking rules for plan fiduciaries. Here’s what it means to named fiduciaries of ERISA plans. BY R.L. “DICK” BILLINGS
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f you grew up in the mid- to late ’70s like me, you know well the many detective movies starring Clint Eastwood – certain phrases from which have become part of the American lexicon. Two come to mind: “A man has to know his limitations” and “Do I feel lucky? Well, do ya, punk?” One limitation with which we all struggle is that we are creatures of habit. We get used to something and then stick with it. For named fiduciaries of ERISA retirement plans, Modern Portfolio Theory (MPT) may be one. This concept has been around so long, we just take for granted that all one must do is satisfy MPT and all is well. However, two recent court decisions are now requiring fiduciaries of participantdirected 401(k) and ERISA 403(b) plans to change how they traditionally benchmarked their funds. A little history. MPT was introduced by Nobel Prizewinning economist Harry Markowitz in a 1952 essay. His theory was that it was possible to construct an efficient frontier of optimal portfolios offering the maximum possible expected return for a given level of risk. In other words, based upon statistical measures like variance and correlation,
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an individual’s return is less important than how the investment behaves in the context of the entire portfolio. Many software programs used today by investment advisors for retirement plans utilize MPT as their primary algorithm. Primary reliance on MPT when reviewing funds for “efficiency” raises potential liability issues, not just for outside investment advisors, but for plan sponsors as well. Is MPT – created 67 years ago – still relevant today? Absolutely. But with regard to an ERISA-covered retirement plan in which participants must make their own investment decisions – not so much. Let‘s look at these two court decisions to see how MPT, while a very valuable tool, does not work so well in most plans today – especially if you are the named fiduciary1 of a participant-directed plan. TIBBLE V. EDISON INTERNATIONAL
It’s likely that you are at least vaguely familiar with Tibble,2 a case decided 9-0 by the U.S. Supreme Court in 2015 in favor of the participant-plaintiffs. The decision was based upon ERISA’s fiduciary duty, which the Court explained is
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