More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
The drafters of ERISA in the 1970s, "never contemplated ERISA being used as it is today," Matthew Hutcheson noted at the Independent Fiduciary Symposium, as he introduced Jeff Mamorsky, chairman of the Global Benefits and Compensation Group at Manhattan-based law firm Greenberg Traurig. Mamorsky is one of the original drafters of ERISA legislation and a leading expert on ERISA law. Instead, Hutcheson added, they had "anticipated independent fiduciaries would run the plans."
Speaking at the Symposium in New York on Wednesday, May 26, Mamorsky asserted that, "the independent fiduciary is the most important position in the ERISA world today." Sponsors don't want to have fiduciary responsibility for their ERISA plans. Most don't have the time or skills needed to fulfill this responsibility, according to Mamorsky. And many don't even realize that they have a fiduciary obligation to participants; that leaves them open to lawsuits by participants or missing compliance with IRS or ERISA rules that could disqualify a plan--and result in hefty monetary sanctions.
When sponsors understand that they can outsource the fiduciary responsibility to an expert, it would seem to be an easy choice for them to make. Mamorsky says this area of expertise is ready to "explode," especially with the changes pending in Department of Labor legislation that is expected to require that plans reveal all fees or costs to participants.
Far from a typical plan in which, say, 401(k) participants must pick their own portfolios even if they totally lack investing expertise, the goals for plans run by an independent fiduciaries include better run plans that stay qualified, with a lower cost to participants, professionally managed portfolios--not target date funds--but portfolios; and the offloading of the fiduciary responsibilities from the sponsor. The individuals don't pick the investments for their portfolio--investment fiduciaries do.
An independent fiduciary is the "decision maker" on an ERISA plan, the "named fiduciary" in the plan document--a/k/a the "big Kahuna," according to Hutcheson. He or she has the power to name other, limited fiduciaries including the administrator (the plan's "communicator"), investment fiduciary, and the fiduciary responsible for monitoring the plan. The named fiduciary is appointed by the board of the company after the current fiduciary resigns; that "starts the clock ticking" on a three-year residual fiduciary duty of the sponsor.
But what about all the liability being the named fiduciary would involves? Hutcheson says that if you are fulfilling your "responsibilities as a fiduciary," have processes and procedures in place, know the best people or firms to appoint, then there's no liability, only fiduciary responsibility. He asks: "Where's the liability if you are doing the right thing?"
Mamorsky says, however, that it is critically important to "get a legal opinion," in order to make sure that the proper IRS mandated procedures are in place. Otherwise, the plan can become disqualified and the IRS levies heavy sanctions for "failure to follow terms of plan documents," and other IRS violations. "The greatest fiduciary duty an independent fiduciary has is to make sure the plan stays qualified," he explains.
Comments? Please send them to firstname.lastname@example.org. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.