I recently spoke at a seminar where the question was raised about a plan sponsor’s obligations to act where they see participants have made foolish investment choices in their self-directed accounts. Is there a fiduciary obligation to tell participants that they have made an unwise investment choice?

Well, the short answer is no, there is not. That is the nature of defined contribution plans. There is a fiduciary obligation to provide appropriate diversity and sufficient options for investment. And there is a responsibility to provide some type of educational component to participants.

But a plan sponsor should not substitute their own opinions with respect to appropriate retirement investing for the choices made by participants. Fiduciaries have to operate on the assumption that participants have made an election based on their own goals and objectives. The best that a fiduciary can do is limit the investment options in a plan to those strategies that meet the acceptable diversification criteria outlined in ERISA.

That said, there are times when a fiduciary can make an investment election for a participant and, if done properly, the fiduciary is protected from claims of breach of fiduciary duty. Such was the case in Bidwell v. Univ. Medical Ctr., a recent decision from the 6th Circuit Court of Appeals.

In this case, the plan administrator elected to change the default investment from a stable value fund to a target date fund. Participants in the stable value fund were notified that unless instructed otherwise, the plan administrator would move their account balances to the target date fund. Two participants claimed they did not receive notice and brought suit for losses they sustained because of the transfer.

The appeals court upheld the district court’s determination that a breach of fiduciary duty had not occurred because the safe harbor for qualified default elections protects the plan administrator if a participant fails to make an affirmative investment election. This was the case not just for the initial election, but also subsequent elections like this. If notice is provided, a failure by the participant to affirmatively elect means the plan administrator can apply the appropriate default election, even to funds already invested.

So participants can pick whatever options are available, and plan administrators have to make appropriate options available. At the same time, plan administrators are protected if they have qualified default investment options in place to cover those participants that don’t make appropriate elections.

Choosing the default investment option, providing appropriate notice and properly diversifying options are all things a plan administrator must do to protect participants. But you also have to let them make their own choices, ideally with some educational assistance. And don’t be afraid to ask your plan professionals for assistance in making sure your plan has the right pieces.

Keith R. McMurdy is a partner with Fox Rothschild LLP. He can be reached at 212.878.7919 or kmcmurdy@foxrothschild.com.

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