Where did all the trust go?
Roland|Criss
Since 2000, we provide fiduciary risk solutions to enterprises that sponsor employee benefit plans.
Why and How Fiduciaries Should Reclaim Their Management Role and Reduce Risk
Less than a decade ago, "trust" was a go-to descriptor for members of retirement plan committees seeking to alleviate personal or corporate concerns regarding investment decisions or employees' financial futures.?Committees trusted well-reputed investment firms (and in many cases, recordkeepers) to deliver on their hope of exponential returns.?The committees trusted those service providers to advise them on choosing appropriate investment options that maximize long-term benefits.
In the litigation age, "trust us" doesn't work anymore.
That was before the legal community exposed overpricing of investment and recordkeeping services and employees began suing their employers at an alarming rate for allowing it to happen.?The pace of such lawsuits continues to grow, threatening the careers of the executives who populate employee benefit plan committees, the financial health of the employers, and their reputations.
In the litigation age, "trust us" doesn't work anymore – not for executives responsible for their employees' financial well-being.?Fiduciaries – those executives who make decisions regarding a company's retirement plan– must be proactive to disarm the veils that disguise some investment firms and recordkeepers as trustworthy partners in corporate financial responsibility.?If financial missteps surface, the executives and committees who chose the vendors – not the vendors themselves – will pay the (theoretical and literal) price.
The Veils of Trustworthiness
Service providers work hard to promote three veils of trustworthiness; the veil of complexity, the veil of conflicts, and the veil of authenticity.?The apparent intent is to provide a seemingly unbiased rationale for why executives should entrust their highest burden of responsibility (that of their employees' financial futures) to service providers, who appear more knowledgeable and experienced in fiduciary law and process.
With these veils in place, many executives and committees dubbed with the responsibility of overseeing their employees' retirement and pension plan assets abdicating their fiduciary duties to investment advisors, money managers, recordkeepers, and other third-party vendors that do not have the same responsibilities to uphold by law.?As such, vendors can (and do) invent their own standards for "safeguarding" and "growing" wealth for employees to whom they have no legal accountability.?Fiduciary executives and committees partner with these vendors under their guise of trustworthiness and responsibility when, in fact, these partnerships can strip executives of their decision-making power and place them – inadvertently or not – in the line of fire if and when consequences unfold for ethical or financial failure.
The Veil of Complexity
The esoteric nature of fiduciary laws and regulations gives service providers a distinct advantage when selling their services to corporate fiduciary committees.?Of the most cerebral CEOs and executive committee members, only a tiny percentage of that elite class (specifically, those who have had training or education relating to pension laws like ERISA or trust statutes like UPMIFA) can fully comprehend the jargon and legal implications regarding managing other peoples' money, the selection of various plans, and the processes they must execute on behalf of their plan participants.?Service providers leverage this position to make an (easy) argument for why clients should "leave it to the pros."?That leaves the corporate executive team susceptible to potential fee gouging or unintentional neglect of its fiduciary duties.
The Veil of Conflicts
One of the most pervasive functions of the executive class is to maximize cost efficiencies, wherever possible and pragmatic, for a retirement plan.?Service providers work to accommodate this need by offering many fiduciary supply chain services in a bundled, one-stop-shop package for executive investment committees.?From investment advice to recordkeeping to custodial duties and money management, these business units frequently exist under one common ownership or company (also known as conflicts of interest).?The vendors' enticing claims to executive teams regarding the "bundle approach" usually include the promise of benefits that too often fail to materialize.
A careful review of these vendor conflicts of interest might reveal astonishing overpricing for services hidden by the mirage of "efficiencies" the vendor represented.
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The Veil of Authenticity
Many providers of services to qualified retirement plans represent themselves as genuine, devoted partners to the plans – from their brands to their marketing presentations to their detailed, regular client updates.?By all accounts, these vendors' efforts are focused on helping their clients' retirement plans to be successful.?Unfortunately, while plan fiduciaries may interpret that vendors act in their clients' best interest, some vendors are authentic in one thing, and one thing only: their desire to be profitable.
Being profitable does not necessarily exist to the exclusion of being ethical and representing clients' interests, but U.S. pension and trust laws blur this line of profitability vs. ethics to an even fainter shade of gray.?For retirement plan sponsors, fiduciary rules require that they adhere to strict processes relating to managing their employees' retirement plans.?For service providers, no laws burden them with a fiduciary duty equal to that of their clients.?Hence, a fundamental misalignment of interests at play renders the Veil of Authenticity for what it is, a deceptive ploy.
Lifting the Veils: Reclaiming Fiduciary Decision-Making Power
How do committees take back the power of making their most impactful financial safekeeping decisions on behalf of their plans' participants??Corporate executives must uncover the service provider veils that disguise misguided management practices as a responsible partnership to make a powerful difference as fiduciaries.
All three of the vendor veils addressed in this article tap into those imperatives executives seek to be successful in their roles – the need to delegate to trusted advisors who are experts in their field (veil of complexity), the need to seek efficiencies (veil of conflicts), and the need to feel informed (veil of authenticity).?For committees without an acute awareness of their role as fiduciaries, vendors are ideally positioned to take advantage of these fiduciaries seeking a seemingly quick and efficient "fix" to their retirement plan responsibilities.
Below are concrete ways fiduciary executives can take back their decision-making authority and protect the future of their retirement plans and their careers.
Get Training. ?Retirement plan officials should participate in an ongoing?training program covering all relevant fiduciary duties.?At a minimum, training topics should include:
Commission an Assessment. ?Hire a qualified, independent, third-party firm to review your committee's practices.
Examine Vendors' Service Agreements. ?A study of your plan's existing service agreement with its vendors may clarify a vendor's actual role as it relates to your committee's fiduciary duty.?If your vendor claims in person to be a "plan fiduciary" or "co-fiduciary" for the company, see if that language is in writing and appropriately defined.
Get Unbiased Advice.?To be sure you are fulfilling your legal duty and making the best decisions on behalf of your employees, seek the partnership of an independent administrative fiduciary that specializes in employee benefit risk management. That type of firm can be an indispensable member of your fiduciary team, ensuring your decisions are sound and even accepting liability for the guidance it provides.