2/27/14 4:46 PM – What You Don’t Know About Fiduciaries Could Hurt You – Retirement Plans

If you have any input into your company retirement plan, a term you need to become familiar with is the term fiduciary. According to fi360, a fiduciary is “a person in a special position of trust on whom others rely.” As such, fiduciaries are required to:

1) Act in the best interest of those that rely upon them
2) Act prudently
3) Act honestly and make full disclosure
4) Avoid conflicts of interest and
5) Fully disclose any unavoidable conflicts of interest

In retirement plans, the primary person acting as a fiduciary is the one named in the plan document, usually the CEO of the company sponsoring the plan. Others who can make decisions regarding the plan, like a CFO or the head of HR may also be fiduciaries. As such, they must adhere to the principles listed above.

Most importantly, retirement plan fiduciaries must document that they have met these standards in a number of areas related to retirement plans in case of an audit by the Dept. of Labor (DOL) or in case of a lawsuit by a disgruntled former participant. This is also simply doing what is right. Worse, fiduciaries have personal financial liability if they are found to have breached their duties.

Most plan fiduciaries at the company level think they are off the hook if they hire outside advisors like an investment advisor and 3rd party administrator. Not so fast!

Plan fiduciaries can only share liability to the extent they “properly appoint” and monitor outside parties. Simply naming your stockbroker or insurance agent as the plan investment advisor without having gone through a prudent process of setting down in writing any criteria to judge them by and no written instructions for them to manage investments by is a good way to fail the proper appointment test and perhaps nullify the sharing of liability.

The second test (monitoring), including the documentation of efforts to see that their expenses are reasonable (very often they are not, in light of what they actually do), is another stumbling block. Have you benchmarked advisor or 3rd party administrator fees according to your plan size? Do you know where to find that information? Have you checked the advisor’s regulatory record, gotten a copy of their surety bond and checked on their experience and training with respect to retirement plans? If not, auditors and attorneys will want to know why you haven’t.

Another stumbling block is that most brokerage firm or insurance company employees are not allowed to sign a form declaring themselves to be fiduciaries, accepting that responsibility and liability. That should be a huge red flag. Registered investment advisors (RIAs) usually are willing to sign as fiduciaries. Beware of someone agreeing to act as “co-fiduciary,” which is virtually a meaningless term.

Cornerstone Investment Services is an RIA and I accept designation as a fiduciary and have a certification in fiduciary training. I have 30 years of investment experience and work with a fair number of qualified retirement plans. I have made sizeable improvements in every plan I have taken over during the last couple years and would welcome the opportunity to consult with you on your plan.