The Dilution of the Retirement Plan Fiduciary
By Rick Rodgers
“Genius is making complex ideas simple, not making simple ideas complex.”
In recent years, the term “fiduciary” has been tossed out like parade candy. Is my broker a fiduciary? Is my financial planner a fiduciary? What about my investment advisor? My recordkeeper? What should be a simple concept has become quite complicated. Industry titles can further the confusion, as no standards exist for them. Many investment advisors are also financial planners, but not all financial planners are investment advisors. Those who operate as financial planners can be brokers as well, creating financial plans designed to be implemented with commissionable products.
With so many different titles for financial professionals, it can be hard to determine who is a fiduciary, acting in your best interest, and who is not. This holds especially true when these professionals appear to provide fiduciary-like services or even present themselves as fiduciaries, when, in reality, they are not.
A true fiduciary is a person or organization that acts on behalf of another person or group, putting their client’s interest ahead of their own, with a duty to preserve good faith and trust. A fiduciary is legally bound to put their clients’ or retirement plan participants’ best interests ahead of their own.
When a broker makes a commission from selling a product to his or her client, the broker is by nature acting in his or her own interests and therefore cannot be a fiduciary. It can also be unclear for recordkeepers, money managers, bankers, and many others when acting solely in their professional capacities. While many of these professionals may provide fiduciary-like services, they may not necessarily be a fiduciary to the plan or its participants.
Every retirement plan must have at least one named fiduciary, often the plan sponsor or a committee empowered by the plan sponsor. If the plan sponsor’s named fiduciary does not feel qualified to make decisions on behalf of the plan, then it is incumbent upon the named fiduciary to hire an external fiduciary who is an expert, qualified and unconflicted.
Why is finding a true fiduciary so challenging? There are many factors at play here. The complicated regulatory landscape is ever-changing and, at times, conflicting regulations abound. Amongst the Department of Labor (“DOL”), the Securities and Exchange Commission (“SEC”), and other regulatory authorities, it can be hard to keep up with the various standards and exemptions for fiduciaries.
Professions like accounting and law operate under a strict code of ethics and standards for business practices. Conflicts of interest are more readily tolerated in the financial services industry, which lacks similar professional requirements. This fact further contributes to the challenge plan fiduciaries face when attempting to identify potential conflicts. Sadly, many financial incentives are in place to reward advisors for non-fiduciary activities. In many cases, compensation and commissions for non-fiduciary products and services are more remunerative than are the fees earned for fiduciary services.
Compliance and legal opinions, rather than moral discernment, are a further example of a barrier to finding true ethical fiduciaries. As mentioned above, financial rewards may be greater for non-fiduciary services, so some investment professionals may look for the best way simply to stay compliant rather than adhering to a true fiduciary standard. An exemplary fiduciary will not compromise a client’s best interest for their own, but instead will hold themselves to the highest of standards and values. They will use true moral discernment when acting in a fiduciary capacity and not just look for the easiest way to “check the box.”
Retirement plan fiduciaries must meet their responsibilities and have a documented process for oversight of the plan. Some of the general responsibilities of a retirement plan fiduciary, as stated by the DOL, are acting solely in the best interests of plan participants, carrying out duties prudently, following plan documents, diversifying plan investments, and paying reasonable plan expenses.
One of the biggest causes of ERISA litigation comes from misplaced trust, whether intentional or due to benign neglect. Plan sponsors may have the perception that a recordkeeper is acting in the best interest of the participants when the recordkeeper makes a recommendation. This is not always the case, and recordkeepers are not legally required to do so. Recordkeepers may profit through proprietary products in the investment menu and/or managed account services, among other things. It is incumbent upon fiduciaries to carefully and independently weigh the costs and anticipated benefits of any products and services offered to plan participants, particularly if the costs are to be borne by the participants (whether visible or not).
Advisory and other financial services businesses can also pose monitoring challenges for fiduciaries. Many advisory or insurance firms also generate revenue from non-fiduciary services and products, often leveraging their relationship with the retirement plan to do so. These firms do not always clearly disclose that they receive compensation for these services to their clients, creating challenges for fiduciaries. For example, an advisor could consistently recommend that clients place recordkeeping business with an insurance company that provides financial benefits to the advisor’s parent company. Although this may seem innocuous, it calls into question the independence of the selection process.
What can a plan sponsor do to mitigate all these challenges they are facing? Decades of regulation have not fully addressed this question and it seems unlikely that regulations alone will fix the problem in the future. Likewise, given the material financial disincentives that exist in the financial services industry itself, it seems equally unlikely that the industry will internally address this issue. An educated purchaser is likely the best and most effective short-term solution. As most plan-sponsor fiduciaries may lack the necessary background to serve as their own educated purchaser, a critical step in addressing the issue is to hire fiduciary experts that simply and clearly lack any conflicts of interest on either a personal or firm-wide basis. If enough plan sponsors educate themselves on what makes a good fiduciary and enough boards and committees commit to only working with those who are fiduciaries of the highest standard, the marketplace may move in that direction over time. In the meantime, keep it simple.