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Retirement Planning > Retirement Investing

Why C-Suite Execs Should Not Serve as Retirement Plan Fiduciaries

By Mitchell Shames

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What You Need to Know

  • Today’s investment fiduciary needs to maintain expertise in a long and varied list of products.
  • Placing fiduciary duties on C-suite executives means they have two jobs, and might not perform either well.
  • Hiring outside professional fiduciaries can alleviate this problem.

Retirement plan fiduciaries are in a no-win situation. Notwithstanding the best of intentions, the legacy plan infrastructures relating back to 1974 (the year ERISA was enacted) is crumbling under the weight of innovation in financial products, thousands of pages of regulations, and a newly empowered plaintiff’s bar after the recent Supreme Court case Hughes v. Northwestern. Something must change.

For the moment, let’s set aside the regulatory front and the tidal wave of litigation so that we can focus simply on the realm of investments.

Recognizing that the investment landscape is different today than it was in 1974 is an understatement. Back in 1974, cutting-edge investment theory (influenced by modern portfolio theory imported from leading business schools) suggested that investors were not able to “beat the market” and therefore should index their portfolios against broad market benchmarks.

As a result, a significant portion of retirement assets were directed to index funds.

The intervening years have witnessed an extraordinary explosion in the proliferation of investment products offered by asset managers, insurance companies and investment banks.  In fact, indexing now appears downright quaint.

Today’s investment fiduciary needs to maintain expertise on products ranging among the following: active management, derivative strategies, liability driven investing, long-short strategies, private equity, venture capital, real estate, target date funds and ESG.

Most recently, annuity contracts have been added into the mix, and in the not-too-distant future, cryptocurrencies are likely to join the lineup.

The most daunting aspect of a fiduciary’s responsibility, however, is that they already have day jobs. Generally, most retirement plan fiduciary committees consist of C-suite executives and senior managers such as the general counsel, head of human resources, treasurer and comptroller. These executives are not investment professionals.

The fiduciary task of running a retirement plan is then added on top of their responsibilities for executing business strategies and growing earnings. They don’t simply have day jobs, they have critical day jobs.

Loophole

Therefore, fiduciaries are placed in the worst of situations. They are saddled with significant responsibilities with respect to the retirement plans (which also carry potential personal liability for any missteps), and they don’t have the expertise or the time necessary to devote to the task because they are also responsible for running the company.

Fortunately, ERISA does not require that these senior executives be stretched so thin.

Nowhere in ERISA does it state that senior executives of plan sponsors must serve as the fiduciaries of their plans.

That’s right. While ERISA requires the designation of a “named fiduciary,” there is no requirement that the named fiduciary be the plan sponsor, a delegated committee, director, officer or employee of the plan sponsor.

Appointment of a professional fiduciary can cut the Gordian knot of retirement plan management. Hiring professional fiduciaries, experts in the various aspects of managing and overseeing retirement plans, can relieve plan fiduciaries of this stressful, often thankless responsibility.

Professional fiduciaries are truly the prudent experts envisioned and required by ERISA.

There is a simple elegance to this solution, something quite obvious about this proposal. It meets the basic business maxim of putting the right people in the right job. All too often, however, this idea will prompt “gee, we’ve never done it like that” or “we’ve always done it this way.”

When it comes to internal corporate processes, the status quo is often comfortable and acceptable.

With the growth of complexity in maintaining retirement plans, it may be time to review the status quo. Plan sponsors and fiduciaries should take a good look in the mirror and ask: “Are we the experts we need to be for these tasks?” “Are these skills part of our core competency?” “Is the status quo truly in the best interest of plan participants?”

Too much is at stake to tolerate less than honest answers: the retirement savings of millions of hardworking Americans.

Mitchell Shames is founder and managing director of Harrison Fiduciary.

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