Can I really outsource my fiduciary responsibility?

Investing is complicated enough, and when you throw a bunch of Department of Labor regulations into the mix, things get even more complicated.

So as this article in Investment News points out, many are reacting to this by trying to outsource some fiduciary functions:  "The solution involves outsourcing fiduciary functions, and several investment advisory firms — chief among them Morningstar Investment Management, Wilshire Associates Inc. and the advisory arm of Mesirow Financial Holdings Inc. — now are providing investment menu design, fund selection, market commentary and other services to small-plan sponsors and the broker-dealers and insurers who sell such plans."  Who can blame them?

But wait, look a little further an you'll see this little tidbit: "Acting under Section 3(21) of the Employee Retirement Income Security Act of 1974, an asset manager becomes a co-fiduciary and shares fiduciary responsibility..."

So, as Ari Rosenbaum also points out, plan sponsors are still on the hook.  There is just no easy replacement for understanding the fund lineup being offered and making sure the plan participants have the information they need to make good decisions.

More DOL investigations - this time with irony!

Following up on our recent post titled "Investigations into improper advice" about the increasing number Department of Labor investigations into breaches of fiduciary duty, we found an interesting Businessweek article by Anthony Effinger.  The article tells the story of an independent fiduciary being sued by retirement plans for breach of fiduciary duty.  Sounds run-of-the-mill until you see that the independent fiduciary had said, "The fiduciary duty is the highest duty known to the law," when testifying a few years earlier before a congressional committee.

This story reminds us of several facts for 401(k) plan sponsors:

1. Hiring an independent fiduciary does not necessarily shield you from liability.
2. You shouldn't blindly trust people just because (or maybe especially if) they've testified before Congress.
3. Even if you hire outside help, it is a good idea to be informed.

Good data can help you — trust but verify.

It's so you don't get sued

In a post titled, "Why 401(k) Plan Sponsors Should Make Sure Education and Advice is Offered To Their Participants", Ari Rosenbaum points out:

"Studies have shown that the use of investment education and advice has increased the rate of return for participants.  So plan sponsors who want to boost employee morale, one way is to help increase the retirement savings of their employees because better informed participants will make better investment decisions and net better returns."

Education (including, we might add, good quality information about the mutual funds offered) helps make employees happier about their retirement plan, but Rosenbaum's scarier point is, "Offering education and advice goes a long way in satisfying the fiduciary process under ERISA §404(c) to limit a plan sponsor’s liability."

Investigations into improper advice

Ari Rosenbaum's always informational blog recently brought my attention to an article from Drinker Biddle detailing recent "investigations of broker-dealers related to their services to ERISA retirement plans."

The main points are:

1. That brokers and RIAs can act as plan fiduciaries even if they don't acknowledge that they are acting as plan fiduciaries, such as by giving individualized advice.
2. That these same brokers and RIAs could give prohibited advice by recommending a fund when, for instance, they receive "soft dollar" payments.

We think good data can be a part of helping brokers and RIAs show that the funds that they recommend to plans can be trusted.  And we think that plan sponsors can use good data to ensure that the advice they get from brokers and RIAs.

Consequences for bad funds

The Moneywatch blog has an amazing post by Nathan Hale about a group of employees suing their employer over bad funds offered in their 401(k).  An article by Jilian Mincer and Linda Stern covering the lawsuit reports, "It's one of some three dozen lawsuits filed in recent years in the ongoing tussle over 401(k) costs."  What makes this lawsuit so interesting is that the employer is Ameriprise Financial, who put their own funds into the 401(k) plan.  The employees say that these funds were more expensive than those offered by other managers.

Sure, the story is particularly hilarious when the company being sued is the one that makes the funds.  But remember that all 401(k) plan sponsors are fiduciaries - the interests of the people in the plan go above the interests of the sponsor and the company.

Inveska helps you make sure the funds in your plan can be trusted.

You're on the hook for bad funds

A recent Stuart Robertson article in Forbes should scare some 401(k) plan fiduciaries.  The article's third warning talks about how providers do not share your fiduciary risk.

"And while your rep and provider may have given you a list of funds to select from – and even suggested a few – it’s your responsibility.   The very investment expertise the rep is supposed to be providing is really fully on the employer.  Bad funds?  Your problem.  Employee complaints?  Your problem."

We agree.  If you're a plan sponsor you shouldn't blindly trust your provider.  You should get your own information to be sure you're not being put into a fund solely because of the soft dollars they'll pay.  You need to know the funds you're in can be trusted.  You should share your data with the employees in your plan, too.

Inveska will help.