Federal securities law may contain some helpful insights for retirement plan fiduciaries, as they assess disclosures supplied by service providers.
Retirement plan fiduciaries rely on plan providers (such as recordkeepers) for key pieces of information that are needed to fulfill the fiduciaries’ legal obligations.
For example, service providers must give fiduciaries descriptions of the services provided to the plan and must also disclose all direct compensation to be received for such services — as well as a “description of all indirect compensation “ that the covered service provider “reasonably expects to receive in connection with” providing services to the plan. 29 CFR section 2550.408b-2(c)(2). This information is vital if a fiduciary is to assess whether the provider is receiving reasonable compensation for providing services to the plan.
Similarly, fiduciaries rely on providers to disclose key information — including privacy policies and the fees and features of complex financial products (such as managed accounts or variable annuities) offered to plan participants.
In effect, plan fiduciaries rely on providers for key disclosures that are clear and accurate — even if those disclosures reveal some unflattering truths about a provider. However, it is all too common for plan providers to create disclosure documents that are neither. And, plan fiduciaries often give these providers a “pass” on vague or incomplete disclosures — rather than pressing providers for clear and complete answers.
In assessing representations from providers, plan fiduciaries would benefit from guidance in assessing when and how to push back. Federal securities laws may provide some help in this regard. There is a logical link between securities law and ERISA: both rely heavily on disclosure requirements as vital tools in support of public policy and enforcement, following Justice Brandeis’ observation that “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants…”
The cornerstone for assessing disclosures is Section 10(b) of the Securities Exchange Act of 1934, which prohibits “deceptive” practices. Section 10(b) represents an extensive body of law that might be useful to retirement plan fiduciaries. Here are some key insights from Section 10(b) and Rule 10b-5:
• Omissions are just as bad as outright misrepresentations. A statement violates Rule 10b-5 if it contains an untrue statement of a material fact or if it omits a material fact that is necessary to make the statements made, in light of the circumstances, not misleading.
• A half-truth is no truth at all. A half-truth is still a misrepresentation. A half-truth is a statement which accurately describes some facts, but misleads the listener or reader by concealing other information that is needed for a true understanding.
• Silence is not golden. When there is a duty to disclose, a failure to reveal relevant information is considered to be misleading and, in effect, another form of misrepresentation.
• Timing is not everything. It is misleading for a party to conceal after-acquired information that renders a previously made statement misleading.
Retirement plan fiduciaries must act prudently. Although the definition of a “prudent” fiduciary is open to many interpretations, it is hard to argue that a prudent fiduciary can simply accept and rely on misleading provider disclosures. Perhaps retirement plan fiduciaries should look to federal securities law in evaluating these provider disclosures.