Decentralized Enforcement to Combat Financial Wrongdoing in Pensions: What Types of Watchdogs Are Necessary to Keep the Foxes Out of the Henhouse?

• DOI: http://doi.org/10.1111/ablj.12072
• Date: 01 March 2016
• Author: Dana M. Muir
• Published date: 01 March 2016

Decentralized Enforcement to

Combat Financial Wrongdoing in

Pensions: What Types of Watchdogs

Are Necessary to Keep the Foxes

Out of the Henhouse?

Dana M. Muir*

INTRODUCTION

Americans have more than $23 trillion invested, directly or indirectly,

1

in tax-favored retirement plans.

2

Those workers or former workers may

have at least some of the same investor protections as other sharehold-

ers, including the antifraud provision found in section 10(b) of the

Securities and Exchange Act of 1934 (’34 Act).

3

Americans with assets in

*Arthur F. Thurnau Professor of Business Law, Stephen M. Ross School of Business at the

University of Michigan. I appreciate the research support provided by Michigan Ross. I

am grateful to Maureen Maloney, Peter Jaffee, Andrew Stumpff, John Turner, and partici-

pants in research seminars at the Center for the Study of Business Ethics, Regulation &

Crime at the Robert H. Smith School of Business, University of Maryland, Pozna

n Univer-

sity of Technology, and Stockholm University for comments. One could not ask for a bet-

ter editor than Gideon Mark. Errors remain my own.

1

The extent to which individuals have investment control and ownership over the assets

depends on the type of the retirement plan. See infra text accompanying notes 74–76 (dis-

cussing major retirement plan paradigms).

2

INVESTMENT COMPANY INSTITUTE (ICI), DEFINED CONTRIBUTION PLAN PARTICIPANTS’ACTIVITIES,

FIRST QUARTER 2014, at 2 fig.1 (2014).

3

Pub. L. No. 73-291, § 10(b), 48 Stat. 881, 891 (1934) (codified at 15 U.S.C. § 78j(b)

(2012)); see also Mark Casciari & Ian Morrison, Should the Securities Exchange Act Be the Sole

Federal Remedy for an ERISA Fiduciary Misrepresentation of the Value of Public Employer Stock?,

39 J. MARSHALL L. REV. 637, 637 (2006) (introducing the overlap between securities and

pension laws).

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C2016 The Author

American Business Law Journal V

C2016 Academy of Legal Studies in Business

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American Business Law Journal

Volume 53, Issue 1, 33–96, Spring 2016

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pension plans, “plan participants”

4

in the pension vernacular, however,

face risks of financial wrongdoing

5

that do not threaten other investors.

In pension plans, a variety of intermediaries and service providers stand

between the participants and the investment products in which their

money is invested.

6

Not surprisingly, agency problems abound, and the

trillions of dollars held in pension plans are an enticing target for inter-

mediaries and service providers who are opportunistic, desperate, or

just plain greedy.

7

In more colloquial terms, asking foxes to guard the

henhouse may spell disaster for the chickens.

8

Consider one example. Matthew Hutcheson was one of the first to

hold the designation of Accredited Investment Fiduciary Analyst

TM

(AIFA

V

R

)

9

and acted as an independent fiduciary to a number of benefit

plans, sometimes, according to one interview, having been appointed to

4

See 29 U.S.C. 1132(a)(1) (2012) (providing for private rights of actions by a participant or

beneficiary; referring generally to those with benefits in pension plans as participants or

beneficiaries). Beneficiaries comprise anyone “designated by a participant, or by the terms

of an employee benefit plan, who is or may become entitled to a benefit thereunder.” 29

U.S.C. § 1002(8) (2012). For ease of reference, this article’s use of the term “participants”

also includes beneficiaries.

5

The term “financial wrongdoing” is not defined in either the federal regulation specifi-

cally written for pension plans or the pension literature. This article uses the term in its

most general sense. See infra Part II.C (categorizing the types of financial wrongdoing in

pension plans).

6

See, e.g., Definition of the Term “Fiduciary,” 75 Fed. Reg. 65,263, 65,265 (proposed Oct.

22, 2010) (to be codified at 29 C.F.R. pt. 2510) (referring to the “consultants, advisers and

appraisers” that provide advice to plan fiduciaries).

7

See infra Part II.C. This article takes as a given the current organization and regulation of

the pension system, which enables extensive conflicts of interest. See John H. Langbein,

Trust Law as Regulatory Law: The Unum/Provident Scandal and Judicial Review of Benefit Denials

Under ERISA, 101 NW.U.L.REV. 1315, 1326–27 (2007) (“ERISA expressly authorizes the

employer to use ‘an officer, employee, agent or other representative’ as a fiduciary,

thereby inviting the conflicts of interest that so trouble the law of benefit denials.”) (quot-

ing ERISA § 408(c)(3); 29 U.S.C. § 1108(c)(3) (2000)).

8

See Susan J. Stabile, Is It Time to Admit the Failure of an Employer-Based Pension System?,11

LEWIS &CLARK L. REV. 305, 320 (2007) (“‘Are you letting the fox into the henhouse?’”)

(quoting Julie Tripp, Retirement Plans Face a Major Upheaval Under New Law,O

REGONIAN,

Aug. 27, 2006, at D1 (writing about the conflicts of interest of investment advisors)).

9

See AIFA Designation,FI360, http://www.fi360.com/products-services/designations-overview/

aifa-designation (last visited Oct. 11, 2015).

34 Vol. 53 / American Business Law Journal

the position by federal courts.

10

He authored a scathing law review article

criticizing what he alleged to be high fees and a lack of transparency in 401(k)

plan accounts.

11

In response to a Request for Information by the U.S. Depart-

ment of Labor (DOL), he wrote, “Workers are entitled to fair and prudent

protections from fiduciaries,” and he objected to fiduciary practices that are

“complex, circular, conflicting, and obscure.”

12

Mr. Hutcheson testified in a

public hearing held by the Employee Benefits Security Administration

(EBSA),

13

the agency within the DOL charged with pension plan oversight,

that “American workers who participate in qualified retirement plans are not

being adequately protected but easily could be.”

14

In short, Mr. Hutcheson

has been outspoken on the need to protect employees from financial wrong-

doing in pension plans. This “famed 401(k) fiduciary advocate” now is bring-

ing attention to the issue in a different way. He is serving 210 months in

federal prison and owes restitution of $5.3 million after having been found

guilty on a number of counts for crimes against multiple benefit plans.

15

10

FI360, ANINTERVIEW WITH INDEPENDENT FIDUCIARY,MATTHEW D. HUTCHESON (2009), http://

thefloat.typepad.com/files/fi360-interview-with-matt-hutcheson.pdf.

11

See Matthew D. Hutcheson, Uncovering and Understanding Hidden Fees in Qualified Retire-

ment Plans,15E

LDER L.J. 323, 354–77 (2007).

12

Letter from Matthew D. Hutcheson to Labor Department c/o Katherine L ewis (July 8,

2007), http://www.dol.gov/ebsa/pdf/Hutcheson070807.pdf.

13

Unless indicated otherwise, references to EBSA include the Plan Benefits Security divi-

sion of the DOL Solicitor’s Office, which provides civil litigation and other services to

EBSA. Division of Plan Benefits Security (PBS), U.S. DEP’TOFLABOR, http://www.dol.gov/sol/

organizations/divisions/pbs.htm (last visited Oct. 11, 2015). References to EBSA also

include, where used in referring to past actions, the agency’s predecessors, the Pension

and Welfare Benefits Program, and the Pension and Welfare Benefits Administration. His-

tory of EBSA and ERISA, U.S. DEP’TOFLABOR, http://www.dol.gov/ebsa/aboutebsa/history.

html (last visited Oct. 11, 2015).

14

Hearing on Reasonable Contracts or Arrangements Under Section 408(b)(2)—Fee Disclosure

Before the U.S. Department of Labor Employee Benefits Security Administration, 110th Cong. 2

(2008) (statement of Matthew Hutcheson, Independent ERISA Fiduciary), http://www.dol.

gov/ebsa/pdf/IF408b2.pdf.

15

Darla Mercado, 401(k) Advocate Hutcheson Gets 17 Years for Stealing Client Cash,INVESTMENT

NEWS (July 31, 2013, 4:49 PM), http://www.investmentnews.com/article/20130731/FREE/

130739982; see also FA Staff, Go Directly to Jail,F

IN.ADVISOR (Aug. 1, 2013), http://www.fa-

mag.com/news/pension-fund-trustee-sent-immediately-to-prison-15062.html (explaining

that the judge, calling Mr. Hutcheson “too smart [and] too devious,” ordered him to jail

immediately after sentencing).

2016 / Decentralized Enforcement 35