Some end-of-summer observations on suboptimal fiduciary set-ups, the 'incidental' issue in the fiduciary wars, and reflections on Tibble v Edison.
In my daily reading I sometimes run across some golden nuggets such as the following question, which was posed recently in one of the many excellent blogs that cover the retirement plan marketplace.
Yay, I'm Not a Fiduciary!
"As an employee benefits manager for a large nonprofit hospital, I work with our plan consultants to put together investment recommendations for our Employee Retirement Income Security Act (ERISA) 403(b) plan to the plan's fiduciary committee. I am not a named fiduciary for the plan (the named fiduciary is the committee) and I am not a member of that committee. I do not make any decisions regarding plan investments (or any other decisions regarding the plan, for that matter), and it is not the intent of my employer that I serve as a fiduciary. However, I have read that the Department of Labor (DOL) is tinkering with a more expansive definition of fiduciary, so I am concerned about my fiduciary status. Can you please advise me?"
This enquiry--so innocent and reasonable-looking on its face--helps explain why so many retirement plans in this country are run in such a sub-optimal way and, as a result, harm so many plan participants and their beneficiaries.
The enquiring employee benefits manager "works" with the plan "consultant" to make investment recommendations for the hospital's ERISA 403(b) plan to the plan's fiduciary committee. This manager is 1) not a named fiduciary in the plan document, 2) not a member of the plan's fiduciary committee, 3) doesn't make any decisions regarding plan investments, and 4) doesn't serve as a fiduciary since her or his employer doesn't intend that she or he so serve.
Let's step back a moment to understand this situation and its implications. A non-fiduciary employee benefits manager works together with a non-fiduciary consultant to make investment recommendations to the fiduciary committee. That equation looks like this: a non-fiduciary + a non-fiduciary provides non-fiduciary inputs to --> the fiduciary committee that's required to generate fiduciary outputs.
In many cases, this kind of fiduciary committee (or plan sponsor) will simply accept--in toto--the investment menu recommended by both such non-fiduciaries: the employee benefits manager and consultant. There is no legal obligation, no financial motivation, for the non-fiduciaries here to act in the "sole interests" (the ERISA fiduciary standard) of plan participants and their beneficiaries by, among other things, ensuring that costs are reasonable (and no reason why costs cannot be kept reasonably low) and that model portfolio investment options are diversified broadly and deeply to reduce risk as much as possible so as to avoid large losses in accordance with section 404(a) of ERISA. Broad and deep diversification of portfolio risk can help limit the amounts of decreases in values suffered by many portfolios in market downturns.
It's unlikely that the non-fiduciary employee benefits manager has any understanding of these cost and risk issues, much less even knows that they exist. (Witness the embarrassing ignorance of such managers put in charge of running huge 401(k) plans at large companies with unlimited resources uncovered by class action lawsuits over the last decade or so.) In fact, the non-fiduciary benefits manager typically has little experience with investments--but she or he is still tasked with the non-fiduciary responsibility to make investment recommendations to the fiduciary committee.
Although the non-fiduciary consultant may have "experience" with investments, she or he has little interest in reducing the costs of a plan's investment options and is, at best, indifferent to doing so. In fact, she or he often is motivated to increase those costs because that enhances her or his compensation under the business model they follow. The consultant is busy ensuring that it's carrying out the fiduciary duties it owes to its employer and the employer's stockholders. There's nothing wrong with that model until it gets mixed in with ERISA retirement plans. Once that happens, plan sponsors forget (or much likelier never knew in the first place) that they're entering the caveat emptor zone where the only sole interests that a non-fiduciary service provider takes to heart are its very own.