Ed. Note:This is the first in a series of selected articles on fiduciary issues that were submitted in the fi360 Fiduciary Article Competition. We will run these over the next several weeks, featuring them in the Inside Wealth Management newsletter each Wednesday. To sign up for Inside Wealth (at no charge), click here.
Mark Twain said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Twain didn’t have a 401(k), but his words reflect the understanding most 401(k) plan sponsors have of their fiduciary responsibility.
Recently I had the opportunity to meet with a cantankerous CEO who exclaimed “we have people handling all this fiduciary stuff…they told me we’re bullet-proof!” I’m not looking forward to highlighting the mouse-print in his service providers’ contracts indicating “that just ain’t so.”
Most Plan Sponsors Unaware of Their Fiduciary Duty
Unbeknownst to him, he is in breach of his fiduciary duty for allowing his plan participants to pay more than $100,000 in excessive fees. He also admitted that he chose his current 401(k) service provider because that service provider would refer business to his company. He was unaware that a fiduciary receiving consideration in connection with plan assets is known as self-dealing. Under the Employee Retirement Income Security Act (ERISA), self dealing is a prohibited transaction for which this CEO could face significant fines and penalties—so much for bullet-proof, let the buyer beware!
Why are we talking about fiduciary responsibility now? It’s only been since the Enron & WorldCom debacles that the Department of Labor (DOL) has stepped up its efforts to enforce the fiduciary requirements of ERISA, and the rate of fiduciary breach lawsuits has increased significantly over the past few years. Unfortunately, most plan sponsors are unaware of their fiduciary duties, or in many cases that they are fiduciaries. While a CEO might be the named fiduciary, many other employees are usually functional fiduciaries. Anyone within a company that has any responsibility or influence regarding their 401(k) is probably a fiduciary—and fiduciary responsibility carries potential personal liability!
A large part of fulfilling one’s fiduciary responsibility, and the focus of many of the current fiduciary breach lawsuits, involves the reasonableness of the fees and compensation paid to 401(k) service providers. This can be a challenging task since much of the fees and compensation are not an easily identified hard dollar line item on an invoice. Furthermore, these fees and compensation are often hidden or hard to find within contracts and prospectuses which can amount to hundreds of pages.
What’s the Big Deal About Fees?
Ben Franklin’sold adage, “A penny saved is a penny earned,” applies here, and those pennies really add up. According to the DOL, a 1% difference in fees and expenses over an average 35 year working career could reduce a participant’s account balance at retirement by 28%!
While ERISA requires plan sponsors who do not have the fiduciary knowledge to seek the assistance of independent experts, most plan sponsors, including the cantankerous CEO, unknowingly seek expertise from non-fiduciary service providers. Many plan sponsors believe that the person who sold them their plan has an obligation to fulfill these responsibilities, but this is rarely the case.
This misperception is not surprising given a 2010 survey by ORC/Infogroup, which found that 76% of U.S. investors wrongly believed that “financial advisors” are held to a fiduciary standard. In fact, financial advisors and most 401(k) service providers have no fiduciary obligation, usually deny any fiduciary status in the fine print of their contracts, and aren’t even obligated to put their client’s interest ahead of their own. In other words,
let the buyer beware!
A Costly Mistake for Plan Sponsors to Disregard Fiduciary Duty
Given the Department of Labor’s increasing focus, the plaintiff’s bar sensing blood in the water, and the fact that there is no corporate veil of protection for a fiduciary breach, this misperception could prove costly for plan sponsors. Never has the phrase Caveat Emptor been of greater importance! There are many fiduciary traps about which plan sponsors ought to be aware, but here are just two that I find often; mouse-print and name-dropping.
Buyers ought to beware the mouse-print! Mouse-print is the smaller print rarely found on the first page of a marketing piece which is often times quite different than the “large print” found on the first page. For example, the CEO mentioned above held up his “fiduciary warranty” certificate, complete with gold seal, as evidence of why he was “bullet-proof.”
A number of 401(k) service providers offer some sort of “fiduciary warranty.” I’ve met several plan sponsors who were confident that they were fulfilling their fiduciary duties because their advisor said XYX Company would protect them in the event of a fiduciary breach lawsuit. Any reasonable person reading the large-print in a fiduciary warranty marketing piece would probably come to a similar conclusion when they read:
“This unprecedented program offers plan sponsors and fiduciaries greater confidence, security and peace of mind by providing specific assurance for their fund selection. We’re so confident, we promise to restore any losses to the plan and pay litigation costs related to the suitability of our investment process and Fund lineup for 401(k) plans.”*