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Mother Always Said to Read the Fine Print

How financial-services firms can wiggle out of fiduciary responsibility.

W. Scott Simon, 03/03/2011

Have a comment, insight, or burning opinion on this article? Make your feelings known in the comments section at the end of the article.

Last month, I was notified out of the clear blue sky by an organization in the retirement plan marketplace that one of my Morningstar columns from 2005 would be reprinted in its quarterly publication. After posting the column on the organization's website for a planned 90-day members-only look--which was a week before the column was to appear in print--I was notified out of the clear blue sky that it had been yanked, forever barred from appearing under this organization's banner.

The offending column explained in detail how a well-known (but unnamed) plan service provider asserted that it was a fiduciary while the contract its attorneys had drafted signature-ready for plan sponsors negated that claim, for all practical purposes, with an exquisite legal scalpel. Given the circumstances surrounding the sudden cancellation of the reprint, it was apparent that some individual, company or special interest group had given someone their marching orders to bury the column because it touched a raw nerve. Readers can decide for themselves which nerve that might be.

The kind of legal sleight-of-hand employed by the plan service provider highlighted in the reprint is still, unfortunately, all too often present in the retirement plan marketplace today. Examples of this involve certain financial services firms which say one thing in their written marketing materials (and, no doubt, in the oral representations made by their salespeople) while their legally binding contracts say quite another thing. In such instances, we have sales puffery (and worse) on the one hand while on the other we have the law of the Employee Retirement Income Security Act of 1974.

Advisors to qualified retirement plans such as 401(k) plans should be made aware of this vast gulf between perception and reality to not only better understand the nature of their competition but to also help protect the plan sponsors they serve from falling for the fake fiduciary protections peddled by certain financial services firms that also, by the way, have (really, really) non-transparent cost structures.

One such financial-services firm offers fiduciary solutions to plan sponsors. Its marketing materials claim that the firm will "share" the plan sponsor's fiduciary responsibility with respect to the investment options recommended by the firm for the sponsor's plan. That's a pretty powerful statement and no doubt was included to impress plan sponsors and garner business form them. The only problem with it is that it's legally untrue. The reason why has to do with the duties of the sponsor of a retirement plan and those of a so-called "co-fiduciary."

An important cluster of fiduciary duties required of every sponsor of a qualified retirement plan is to select, monitor and replace the plan's investment options. While it's true that most litigation under ERISA alleges administrative and operational problems with plans, fiduciaries at plan sponsors are often sued for providing imprudent plan investment options--like retail-priced options in multibillion-dollar 401(k) plans. An ERISA section 3(38) Investment Manager is one legally viable way by which plan sponsor fiduciaries can off-load their duties and liabilities associated with providing prudent investment options for a plan--subject, of course, to the sponsor exercising prudence at both the initial decision point to off-load and then on an ongoing basis. A more comprehensive way by which plan sponsor fiduciaries can off-load even more duties and liabilities is for them to appoint a 3(21) Named Fiduciary that, in effect, runs the plan for a sponsor. Topping even that in the protection of plan sponsors is when a sponsor steers its plan into a multiple employer plan with robust fiduciary checks and balances and truly prudent investment options.

None of these appointed fiduciaries "share" the duties delegated to them by a plan sponsor. After all, that's why a sponsor bloody well delegates them in the first place: to get them off their plate. For example, an ERISA section 3(38) Investment Manager doesn't share a plan sponsor's fiduciary responsibility with respect to the prudence of plan investment options; instead, it has "sole" carefully defined legal responsibility and liability for them because the sponsor has delegated them to it.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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