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"A “To be trusted is a greater compliment than being loved.” |
As a fiduciary, you already have a sense of the special responsibility that comes with the trust others have placed in you as a result of your position. Elsewhere on this site we discuss the Fiduciary Standard that we feel clients have a right to expect from us as financial advisors, but in this space we want to address your role as a fiduciary and how someone in your position can discharge your fiduciary duty in the most effective way while also protecting yourself and your organization from the liability that comes with your status as a fiduciary.
First, what exactly is a fiduciary? In the broadest sense, a fiduciary is someone who is entrusted to make good decisions on behalf of someone else. In our work the most common type of fiduciary we see are those with responsibility for their company’s retirement plan. This type of fiduciary’s conduct is governed by both common law as well as explicit federal law such as the Employee Retirement Income Security Act of 1974 (ERISA). ERISA imposes lots of requirements on plan fiduciaries, but they are all designed to make sure that plan participants are treated fairly and that plans operate for the exclusive benefit of the participants. The Department of Labor has a good primer about how plan fiduciaries should behave called Meeting Your Fiduciary Responsibilities.
When we work with ERISA fiduciaries, much of our time and attention is focused on reducing their fiduciary liability. In other words, we want to help them make sure that they don’t run afoul of any of the provisions of ERISA or the rules that the Department of Labor and other government agencies have designed to help them enforce ERISA’s provisions. This may appear at first blush to be relatively straight forward – if a fiduciary does nothing wrong, then they should have nothing to fear. Intuitively this sounds reasonable, but we have certainly seen cases where the plan sponsor means well and the plan fiduciaries are good people doing the best that they can, yet they end up dealing with enforcement or lawsuit issues. Then they call us. Part of the problem is that what is “right” or “wrong” in the retirement plan world is constantly changing, or more precisely, evolving. That is why MillenniuM has developed our “best practices” model for plan sponsor clients. It is designed to keep our clients “ahead of the curve" and therefore unlikely to encounter these difficulties.
It’s easy to understand how a plan can fall behind. Plan sponsors decide they want to offer a plan, they solicit proposals from a number of vendors and then they have to evaluate those proposals, which are completely non-uniform. Although the proposals are lengthy, they are short on specifics and the fees are hard to understand, even if they are disclosed (and they frequently are not fully disclosed). Somehow the sponsor decides on a provider and they are off to the races. But time doesn’t stop. Plans continue to evolve and plan sponsors rarely have the resources to devote to watching developments in the retirement plan arena on a daily basis. Slowly the plan slips behind. What was state of the art five years ago is average today, what was average five years ago is now substandard. Sponsors are busy running their real businesses and generally don’t think much about the plan unless there is a problem. Just as not consistently maintaining a car will eventually allow a minor issue to grow into a major problem, not thinking about the plan can lead to larger problems, too.
When MillenniuM works with a plan sponsor, the ideal situation is for us to become their “VP of Retirement Plans”. Because we are industry veterans who pay attention and understand what is happening in all aspects of the industry day in and day out, we can be sure that any needed small adjustments are made so that nothing big goes wrong. We even accept some of the plan sponsor’s liability by acting as a named fiduciary for the plan. If you want to have a little fun, try calling up your plan’s current financial advisor and ask if they will act as named fiduciary. Veteran industry author and attorney, Fred Reish has written a great article about the use of outside advisors called “The Fiduciary Duty to Ask for Help”.
While we are on this topic, we should probably talk about a popular smoke-and-mirrors trick that some financial services providers have begun to use. They will volunteer to act as “co-fiduciary” to the plan. The implication is clear – that they will accept part of the plan sponsors liability. This is usually an illusion. Morningstar columnist, Scott Simon (a “friend of the firm”), has written a nice concise explanation of this (the full article, which is well worth reading, is here).
Some of these plan providers will, at best, offer to help plan fiduciaries by becoming a co-fiduciary. Be careful, though, this is one of those wolf in sheep’s clothing situations. Although a plan provider offering to be a "co-fiduciary" must comply with the (previously noted) four duties under ERISA section 404(a)(1), such providers refuse to accept real transfer of responsibility (and liability) from plan fiduciaries to themselves because they refuse, by definition, to accept delegation of discretion. In other words, since there’s no discretion, there’s no real transfer of responsibility and therefore no mitigation of any potential liability.
Plan providers such as broker/dealers and insurance companies that peddle this to plan fiduciaries as some sort of "solution" create the illusion that they stand alongside the fiduciaries in equal fiduciary solidarity. The term "co-fiduciary," of course, does appear in ERISA but only to describe legal duties, not as a marketing gimmick.
Plan fiduciaries, then, have a real choice. They can choose the ideal plan investment advisor to work with that offers to remove from their shoulders "virtually all of the fiduciary responsibility" (and liability) for the selection and monitoring of plan investment options via ERISA sections 3(38)/405(d)(1). This method of delegation, grounded in ERISA, is endorsed by leading legal authorities. Or they can choose another method of delegation: a "co-fiduciary" illusion which is endorsed by leading advertising firms and the marketing departments at many broker/dealers and insurance companies.
While the liability reduction aspects of what we do are important, the fee reduction, fund selection, and education services are what make the biggest long term difference for plan participants. Compared to what most plan sponsors are currently doing, these services can actually make MillenniuM’s services “better than free” (as one client put it) because they can save so much more than they cost. If you would like to discuss any plan related issue just email us or call us at (866)-401k-IRS. We look forward to hearing from you.