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Monday, September 29, 2014

If you keep an eye on the investment world at all, you’ve certainly heard the news – Bill Gross, co-founder and chief investment officer of Pacific Investment Management (PIMCO), is leaving the very company he started more than 40 years ago.  In technical terms, Gross is what you call a “big deal” in the investment world.  He has been at the helm of PIMCO for more than four decades leading the company to a whopping $2 trillion in assets under management.  Gross has received countless awards and accolades in the industry for his thought leadership and successes, and is also a well-known writer on investment matters.

Until Friday, Gross managed the PIMCO Total Return fund (PTTCX).  This bond fund ranks as one of the largest mutual funds with a reported $221.6 billion in total fund assets.  And, perhaps more importantly for our readership, this bond fund is a pillar in many 401(k) investment platforms.  Speculation and rumors swirl about the circumstances surrounding Gross’ departure from PIMCO (as well as his decision to join Denver-based Janus); however, one thing is certain – Gross’ departure from PIMCO means that many 401(k) plan fiduciaries are (or soon will be) discerning how to react.

Many investment fiduciaries may choose to put the fund on the plan’s “watch list” in the wake of this manager change.  Departure of such an important part of the PIMCO investment team certainly could be grounds for closer scrutiny of the Total Return fund.

We thought these events presented a good opportunity to revisit the procedural prudence concept and provide an ERISA attorney’s perspective on how to handle this type of change.  It goes without saying, but we’ll say it anyway, that best practice dictates establishment of a written Investment Policy Statement (IPS) that is kept current to ensure investments are made in rational manner and further the purpose of plan and its funding policy.  If the plan’s IPS contains a procedure for monitoring managers or placing them on a “watch list” (as most do), then the plan fiduciaries should follow such policy and document those actions.  Reminder – what is worse than not having an IPS in place?  Not complying with the IPS!

Being a plan fiduciary, especially one with investment oversight, is hard work.  Investment fiduciaries need to establish a thoughtful fiduciary decision-making process pursuant to which they may identify relevant information; gather that information from competent, independent sources; give it due consideration; make a decision consistent with the information; and document the decision.  Often times investment experts are engaged to assist plan fiduciaries in making investment decisions.  Remember, use of these types of experts may be appropriate, particularly when plan fiduciaries don’t have substantial investment expertise.  However, the input of investment fiduciaries should be evaluated pursuant to fiduciary process (not simply rubber stamped without consideration!).

All in all, plan fiduciaries with plan investments in the PIMCO Total Return fund are now faced with making a thoughtful decision on retention and monitoring of the fund.  This decision is not a simple one and requires careful consideration of the IPS, governing plan documentation and, ultimately, what is perceived to be in the best interest of plan participants and beneficiaries.

So, what do you think, is Gross’ departure alone grounds to putting the PIMCO Total Return fund on the “watch list”?

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