Nearly two-thirds of workers have access to an employer-sponsored retirement plan (P. 324.) Consequently, retirement security is a salient issue in US politics and corporate governance. BlackRock, Vanguard Group, and State Street, the three largest investment managers, who own about 20 percent of every company in the S&P 500 Index, offer a menu of mutual funds and other services for employer-sponsored retirement plans. (P. 308.) Institutional investors’ prominence and putative conflicts of interest are hot topics among scholars and regulators. (Pp. 307-21.)
Natalya Shnitser’s must-read article, The 401(k) Conundrum in Corporate Law, argues that these concerns and efforts, however well-intentioned, are based upon shaky theoretical foundations: (i) a description of how employer-sponsored retirement plan decisions are executed that does not reflect the evolution of plan governance and (ii) reliance on outdated information that fails to consider recent trends showing less biased voting decisions among fund managers. The article deftly captures the intersection of corporate governance and employee benefits law.
Paper’s Central Findings
Retirement Business Theory and its Shaky Foundations. The article describes a prevailing “retirement business theory” that emphasizes the potential for conflicts of interest among mutual fund managers. The theory maintains that to avoid losing lucrative retirement-plan business from large corporate employers, the managers act passively or vote pro-management when exercising shareholder voting rights. It is proffered as a reason to examine and even restrict such passive voting practices. However, the research supporting it is outdated and does not reflect the current state of affairs (P. 321) including how plan-investment menu choices and service-provider decisions are generated. Like some scholars, the Securities and Exchange Commission and other regulators have invoked the retirement business theory to justify interventions that could have unintended, adverse consequences.
A More Accurate Description of Retirement-Plan Decision-making. Shnitser offers a more accurate description of the relationship between institutional investors and employer-sponsored retirement plans. Contrary to other scholarly accounts, the article illustrates that corporate management now has more limited influence on retirement plan decisions concerning investment menu options and service providers. Due to recent legal and other developments, corporate directors’ and officers’ influence has been attenuated. The ERISA regime and fiduciary duties attempt to constrain managers from making decisions contrary to the interests of plan participants and beneficiaries. (P. 323-29.) These decisions are now delegated to a plan committee “comprised of employees and advisors with relevant expertise and with appropriate fiduciary training.” (P. 323.) The committees often work in accordance with an investor policy statement (IPS) designed to guide investment and service provider decisions. The IPS sets goals and helps to ensure that plan decisions are made in the interests of participants and that fees are reasonable.
Other Key Factors Disciplining Plan Decision-making
Litigation
Over the past 15 years, ERISA litigation challenging plan management and excessive plan fees has increased in frequency and velocity. Retirement plans have considerably changed as a result. More than 200 cases were filed between January 2020 and June 2022. (Pp. 329-33.) Lawsuits are normally brought as class actions on behalf of thousands of current and former plan participants and beneficiaries. Allegations in these cases fall into two general categories: (i) excessive recordkeeping and administrative fees charged to plan participants and (ii) the “selection and retention” of underperforming and underpriced investments. (Pp. 329-33.) Scrutiny from plaintiff attorneys and the Department of Labor discourages board member and C-suite participation in plan decision-making. Managerial influence is still possible but more muted.
Insurance Markets
Managers of retirement plans customarily are protected by fiduciary liability insurance. Fiduciary insurance providers have a keen interest in litigation risk and tend to monitor and inquire into retirement plan governance, in particular its fiduciary processes and practices and approaches to monitoring investments and benchmarking vendors. (Pp. 328-29.) The insurers’ monitoring role is pivotal and has increased the formality and professionalism of plan committee governance.
These relatively recent trends and developments help to explain why mutual funds, particularly index funds, once passive, are increasingly willing to challenge corporate management. Mutual fund managers have less reason to be concerned about their votes’ impact on retaining or attracting retirement business from U.S. public companies. These fiduciary decisions cannot be made hastily or arbitrarily, or companies risk costly lawsuits and fines.
Paper’s Implications for Scholarly Debate and Future Research
The article calls for updated data and additional research on assumptions about fund manager bias because recent trends point to a sharp reduction. The lack of evidence supporting the retirement business theory points to other decision-making drivers.1
The evolving role of plan committees in response to litigation and insurance risks has increased their discipline, professionalism, and routine adherence to protocols for decisions about investment options and service providers. These forces insulate mutual fund managers from corporate retaliation while enhancing their independence and potential for activism. These evolving trends and others—for example, well-designed pass-through voting mechanisms—may reduce conflicts of interest—benefiting plan participants and retirees. This article is timely because red-state lawmakers are currently riding a wave of anti-ESG backlash, ostensibly to protect the retirement security of Americans. This situation illuminates the connection between employee benefits law and contemporary corporate governance.
- See, e.g., Michal Barzuza, Quinn Curtis & David H. Webber, Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance, 93 S. Cal. L. Rev. 1243, 1291-95 (2020).
