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When Non-Fiduciaries Hold the Fiduciary Keys

Some end-of-summer observations on suboptimal fiduciary set-ups, the 'incidental' issue in the fiduciary wars, and reflections on Tibble v Edison.

W. Scott Simon, 09/03/2015

W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award. 


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.

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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