The Decoupling of Voting and Economic Ownership (IVOR nr. 88) 2012/6.4:6.4 Why Governance Might Work in Mutual Funds

The Decoupling of Voting and Economic Ownership (IVOR nr. 88) 2012/6.4

6.4 Why Governance Might Work in Mutual Funds

Documentgegevens:

mr. M.C. Schouten, datum 01-06-2012

Datum: 01-06-2012
Auteur: mr. M.C. Schouten
JCDI: JCDI:ADS597132:1
Vakgebied(en): Ondernemingsrecht / Rechtspersonenrecht

Even if fund managers may be inclined to ignore the voice of individual investors, they can be expected to heed the voice of 401(k) plan fiduciaries. By 2009, no less than 68 percent of mutual fund investors owned funds inside an employer-sponsored pension plan.1 The employer typically appoints a fiduciary who has a duty onder the Employee Retirement Income Security Act of 1974 "to prudently select and monitor" investment options that participants in the plan can choose from. Under existing law, this duty does not require fiduciaries to minimize fees associated with investment options.2 However, the issue is high on the agenda of the U.S. Department of Labor, which has repeatedly stated that fiduciaries should monitor fees3 and has recently adopted a rule requiring fiduciaries to disclose information regarding fees.4 While these disclosures are intended to enable plan participants to make their own investment decisions, they are likely to increase scrutiny of plan fiduciaries' selection of investment options5 This may cause plan fiduciaries to pay more attention to fees and to oppose fee increases through the informal use of voice, backed by the significant threat of removing the fund from the plan's menu of investment options and replacing it with another mutual fund or a different type of fund altogether.6

In fact, 401(k) plan fiduciaries may already be opposing fee increases through the informal use of voice — we simply don't know. After all, when plan fiduciaries voice their concerns by communicating directly with the fund's directors or with the fund adviser, their activism remains unknown to the public. "Behind the scenes" activism by plan fiduciaries thus is an interesting avenue for future research, especially in light of mounting evidence of behind the scenes activism by corporate shareholders.7

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Investment Company Fact Book 84 (2010).

See Hecker v. Deere & Co., 556 F.3d 575, 578-79 (7th Cir. 2009) (stating that 'nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund.'); see also John M. Vine, Prudent Investing, 38 Tax Mgmt. Comp. Planning J. 1, 5 (2010) (stating that 'ERISA does not require a fiduciary to make the best or most profitable investment decisions'); Jill E. Fisch, Rethinking the Regulation of Securities Intermediaries, 158 U. PA. L. REV. 1961, 1985 (2010) (stating that '[e]xisting law does not require an employer or plan provider to maximize returns or minimize fees.').

See U.S. Dept. of Labor, Understanding Retirement Plan Fees and Expenses 2 (2004) (stating that 'evaluating plan fees and expenses associated with ... investment options ... are an important part of a fiduciary's responsibility' and that this responsibility is ongoing); id. at 3 (stating that 'employers should pay attention to [fees for investment managers, such as mutual fund managers]'); see also U.S. Dept. of Labor, A Look at 401(k) Plan Fees 3 (2010)(stating that employers must 'monitor investment alternatives once selected to see that they continue to be appropriate choices.').

29 CFR § 2550.404a-5(d)(1)(iv).

See John F. Wasik, Pump Up a 401(k) by Lowering the Fees, N.Y. Times (September 15, 2010) (suggesting that the Department of Labor's new rules should enable plan participants to compare fees and hold employers accountable for their selection of investment options).

See Jane Hodges, Cheaper Choice in 401(k)s, Wall St. J. (August 2, 2010) (describing how plans are increasingly offering collective trust funds, which typically have lower expenses than mutual funds); see also Deloitte Consulting LLP & The International Society of Certified Employee Benefit Specialists, 401 (k) Benchmarking Survey 28 (2009) (finding that 72 percent of plan sponsors who responded to the survey handle underperforming funds by replacing them and that 39 percent replaced a fund due to poor performance within the last year).

See e.g., Joseph A. McCahery, Laura T. Starks & Zacharias Sautner, Behind the Scenes: The Corporate Governance Preferences of Institutional Investors (2010) AFA 2011 Denver Meetings Paper, available at http://ssm.com/abstract=1571046; Institutional Shareholder Services, The State of Engagement Between U.S. Corporations and Shareholders (2011); M. Weisbach, W. Carleton & J. Nelson, The Influence of Institutions on Corporate Govemance through Private Negotiations: Evidence from TIAA-CREF, 53 J. Fin. 1335 (1998).