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That Old Fiduciary Feeling

There are few things more rewarding in professional practice than explaining a certain plan investment concept to a participant and seeing the light bulb go on.

W. Scott Simon, 05/02/2013

"I'm sorry, but I haven't understood a thing you've said in the last five minutes."

For an instant I was dumbstruck, but then I leaned back, relaxed, and smiled. I value honesty, and a clearly stated sentiment, belief, assertion, or whatever is something that I--perhaps more than most people--respect. But I must admit  I was taken aback for a moment by what this person said to me in her direct and unblinking way.

The person was a participant in the retirement plan that my partners and I, along with our implementation team, were transitioning as the new investment manager pursuant to section 3(38) of the Employee Retirement Income Security Act of 1974 (ERISA). I was conducting a one-on-one meeting with the participant during the conversion process, and her response was in reply to my recurrent "Does that make sense to you?" question.

When transitioning any retirement plan, my partners and I have always held the strong belief that it's best to put in a lot of time up-front during a longer-than-normal conversion process. This is to help ensure that plan participants "get it" about the fiduciary duties that we owe to them and to the plan, and have a basic understanding of our investment philosophy. A good portion of that time involves one-on-one meetings with plan participants who sign up for them because they want more information and attention than can be provided in a group meeting.

Taken as a whole, these one-on-one meetings can become quite exhausting over the course of a few weeks, just one week, or even a single day. The participant mentioned above was the 12th, or perhaps even 15th, participant I had advised that day. I had talked so much that I was spitting cotton at the end of the day.

Although these meetings can be exhausting, they are nonetheless exhilarating (at least to me). Unlike any other interaction with plan participants, they allow our firm to really get the "pulse" of the new plans we are transitioning so that we can see what's really on the minds of plan participants. Of course, at this stage of our careers we could readily outsource this activity to a third party, but my partners and I (helped by our own employees) would rather be on the front lines/in the trenches/where the rubber meets the road, literally looking plan participants in the eye.

In those face-to-face (and occasional hand-to-hand) meetings with plan participants, we tell them that we are fiduciaries (pursuant to ERISA section 3(38)) to them and their beneficiaries, which is why all the model portfolios we offer on our investment menu are broadly and deeply diversified to reduce risk, and are low cost to boot. Both factors serve to keep more money in the pockets of plan participants (which they immediately understand). We feel the seriousness of the fiduciary duties we owe to plan participants perhaps even more profoundly because our firm's name appears as part of the portfolios' moniker.

Although plan participants may not always understand the concept of diversification much beyond the "don't put your eggs in one basket" warning, they do seem to readily grasp implicitly that risk and return go hand-in-hand: You cannot expect to have a shot at earning higher returns by holding low-risk investments. In short, they freely agree that there's just no "free lunch" in investing. That's true--except in cases where portfolios are broadly diversified ("horizontally" across the asset classes represented in a portfolio) and deeply diversified ("vertically" within each asset class represented in a portfolio) to reduce risk. In such cases, a reduction in return does not go hand-in-hand with a reduction in risk; in fact, risk is reduced while return is not.

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 Understandingis 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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