A Chilling Prospect

Investment News has a story about a Department of Labor investigation into a JP Morgan Chase (JPMC) stable value product that was included as an investment option in several 401(k) plans.  The DOL is working to determine whether JPMC breached its fiduciary duties under ERISA by investing as much as 13% of the fund's assets in private-mortgage debt that was underwritten and rated by JPMC.  According to the story, "[t]he Labor Department could be examining whether the fund holds investments that are inappropriate and whether such risks were disclosed...."  What seems most obvious is that JPMC is at risk of being found having engaged in self-dealing in violation of its fiduciary duty to act in the sole interest of plan beneficiaries.

The most chnilling aspect of the story is that "[i]f the DOL finds that the firm violated ERISA with respect to the investments within the fund, plan sponsors and advisers who recommended it to 401(k) plans could be on the hook for failure to perform the proper due diligence."  That is, since JPMC violated ERISA in managing the fund, employers and advisors may have violated ERISA for failing to uncover JPMC's activity.  A successful due diligence defense will hinge on the nature and availability of the disclosure, the discovery by plan fiduciaries, and the actions taken upon discovery of the activity.  Other factors that may affect the determination: the relationship between the advisor and JPMC, the relationship between the advisor and the administrator, the relationship between the administrator and JPMC, and the compensation mechanism of each of the service providers.

There was a time when an advisor could rely on the information routinely provided by service provider and money managers to satisfy their due diligence responsibilities.  As advisors have gotten closer to employers and their retirement plans and accepted fiduciary status, whether they knew it or not.  As this story indicates, a fiduciary, the advisor assumes responsibilities requiring investigation far beyond the standard management interviews and review of SEC filings.

The aspect of this story that is truly chilling is that there are forces at work to impose a fiduciary duty on advisors covering all of their client relationships.  There are advisors that embrace the opportunity to work this closely with clients and have structured their practices accordingly.  However, not all clients need or are willing to pay for such a high level of service.  Nor are all advisors prepared to conduct business in such a manner.