The Fiduciary Blog

The Fees Paid by Nearly All 401(k) Plan Participants are Excessive

An industry wide study recently completed by the Investment Fiduciary Leadership Council ("IFLC") reveals that participants in most 401(k) plans are being socked with charges that exceed the value of the services they receive.  The findings confirm that
401(k) plan sponsors, and their employees who serve as fiduciaries on their plans, will not pass the Department of Labor's "fee reasonableness" audit.  This spells big trouble for primary plan fiduciaries.

401(k) Fiduciaries Ponder Reasonableness of Fees

The plan sponsor Task Force on ERISA Fees Disclosure and Conflicts of Interest has identified several steps that a fiduciary of a 401(k) plan should take in order to prepare for the Department of Labor's Regulation 408(b)(2).  The Investment Fiduciary Leadership Council ("IFLC") started the task force in September 2008.  Its purpose is to develop for companies that sponsor ERISA qualified benefit plans a process standard for testing the reasonableness of service providers' fees and controlling conflicts of interest.

Plan sponsors have a sincere desire to know what their employees pay for their 401(k) program.  Yet finding out if the costs are reasonable is not so easy. 

At a recent meeting of Task Force members, Roland|Criss unveiled a five step program for plan sponsors that mirrors the supply chain management process found in ISO standards.  The draft of the program contains details on how to conclude if 401(k) plan fees are reasonable.  It also proposes a method to evaluate the conflicts of interest disclosures required in the new regulation.  The Task Force is evaluating the Roland|Criss draft and will likely refine it for adoption and release to fiduciary organizations.

Restoring Trust: the Demand for a Standard of Excellence

In unstable economic conditions, buyers of products and services have a tendency to revamp how they test providers’ quality assurances and costs.  When buyers have been burned or let down, they retrench, protect, and learn from their mistakes.

In the investment industry, buyers are investors and these investors come in different forms.  Investors are; you and me, the public; large and small corporations that sponsor retirement plans for their employees; and public pension funds that control billions of dollars of retirement benefits for city, state, and federal government workers.

The events of the stock market collapse in the fall of 2008 remind investors that their money is not guaranteed.  The double whammy of a credit crisis has revealed that “institutions” – household names in the financial industry – are vulnerable to widespread failure to the point of bankruptcy, takeover, and dissolution. 

The combination of these historic events in the retirement plan industry has created mistrust and deep seeded skepticism among plan sponsors.  Their mistrust is directed towards money managers, recordkeepers, and investment advisors.

 

Here is a case in point.  In response to a service provider that recently announced its merger plans, a plan sponsor client with more than $50 million in participant assets noted, “With this announcement, our committee is having a hard time trusting their advice and guidance.  Of course, the next question must be: on what basis did we trust their advice and guidance when we hired them.”

The issue of provider trustworthiness, credibility, and competence is a wide scale test that is flowing down stream.  As corporate executives and trustees of pension systems field more participant inquiries, complaints, and class action lawsuits, the service provider community has to respond in ways they have not needed to in the past.

Some pundits in the industry improperly suggest that service providers must be more creative in their marketing to be noticed.  Amazingly, they even propose that providers need to be better now because times are tough and people are watching.

The reality is that if in the “good” times a service provider wasn’t pursuing excellence throughout the organization, committed to fee transparency, disciplined in investment philosophy, and tireless in client servicing, it’s unlikely they will rise to these standards in the tough times.  Unless service providers recognize that adopting a standard of excellence and a culture of transparency is the right thing to do and that failure to do so will compromise revenue and corporate value, many energetic sales organizations will experience client defections and reduction in market share.

Investors (buyers) aren’t seeking empty warranties; they are seeking service providers that are committed to a standard of excellence that provides credibility to its claims.  Investors have been reminded that they are no guarantees in the stock market.  Now they want to know who is going to help them and why they should be trusted.

Fortunately for the investment industry a movement began three years ago among investment advisors, investment managers, and recordkeepers to adopt a standard of excellence and get certified against it..  Likewise, corporate retirement plans, public pensions, and foundations seeking to prove the effectiveness of their governance and monitoring system should get prepared and certified to the highest fiduciary standard.

For an online demonstration and further discussion of Roland|Criss’s certification services, contact us at 800-440-3457 ext. 16.  For more information on the organization of certified fiduciaries and recordkeepers, please click here. 

Lessons from Litigation: Plan Sponsors in the Courtroom

Today's post, and the next few that follow, focus on the results of legal action against retirement plan sponsors and their key managers.  The sizes of the sponsors involved range from small privately held companies to large publicly traded companies.  Roland|Criss is serving as an advisor to legal defense teams on investment and administrative fiduciary standards of care.  Knowing this, plan sponsors ask me frequently what they can do to avoid the suffering that many fiduciaries are enduring.  I tell them that much of the pain is unnecessary, but happening just the same, due to ignorance of how to manage their fiduciary duty the right way.

Clues about the threats to mid-managers’ and senior executives’ personal assets are starting to emerge from cases working their way through the courts and the Department of Labor.  An often repeated outcome in the growing number of breach of fiduciary duty cases is defendants’ shock at learning how much they do not know about their legal duty.  This combined with a lack of proof of past conformity to fiduciary standards of care spells big trouble.

The Troubling Culture

Fiduciary risk has emerged as a hot topic in business circles.  Quick to seize on the fear it evokes, many investment consultants have learned that they can sell more business if they say that they takeover fiduciary liability.  This method of selling is growing even though federal law prohibits such a thing.  It is creating a troubling culture in which you should not get caught.

Anyone who serves in a fiduciary role is on the road to trouble when they buy into the idea that they can hire someone to handle their duty for them.  The defense cases in which we are participating reveal that a high percentage of executives trusted the false notion that their investment consultant or record keeper assumed all fiduciary liability.  On a broader scale, this indicates that ignorance among fiduciaries, combined with willful deception by some vendors, will likely lead many more executives into a courtroom.

A Look into the Abyss

If after checking with your investment advisor, pension consultant, and/or record keeper you believe that it, or they, have your fiduciary duty covered…call for help-immediately!

I have looked into the litigation and DOL enforcement abyss.  It is populated with business managers and executives who also thought that their vendors were “the fiduciary.”  Abdicating your role for even the briefest period will put you on a slippery slope that plaintiff lawyers and federal regulators will eagerly exploit.

Getting on a Safe Pathway

The most threatening condition for plan sponsors seen in current lawsuits and DOL action is the lack of an ERISA qualified fiduciary management system.  That is because investment vendors and record keepers, on whom most executives depend for advice, have a serious conflict of interest with plan sponsors.  As a result, they are unable to offer plan sponsors an independent and unbiased management system.  Vendors know this but most sponsors do not.

What should you do?  Get quality fiduciary training from an unbiased professional advisor.  It should not sell investment products but it should be highly skilled with investment analysis.  The experts it assigns to your account should have earned the AIFA^® designation.  The firm should be experienced with investment fiduciary audits and litigation defense.  This is no time to work with a novice.

Roland|Criss offers fiduciary training.  We also provide an added level of protection with our investment governance review.  It produces the ISP Rating^™ (“Investment Steward Practices Rating^™”).  This is a quick way to know how your practices align with the standard against which lawsuits are now being decided.  Call us for more information at (800) 440-3457 and learn how you can know your ISP Rating^™.

Here are some excellent resources that can help you:

Fiduciary Duty: The Six Most Critical Mistakes to Avoid (Roland|Criss Fiduciary Services)
Prudent Practices for Investment Stewards (Fiduciary 360, AICPA, Reish Luftman Reicher & Cohen)

Curing Fiduciary Pain

If you are a fiduciary to a retirement plan, then like most, you have felt the burden of your duties more acutely in recent years. The Pension Protection Act changed many of the ground rules and ERISA class action litigation has become a real threat.  The weight of these forces is mounting. If you are wondering how to evaluate your risk as a fiduciary, you are not alone.

For corporate executives and boards of directors, measuring performance is a primary discipline for creating and maintaining a successful business. Yet these same executives, who function as retirement plan fiduciaries, often lack appropriate measurements for determining if their retirement plans are successful, and equally important, how great is their fiduciary risk.

A recent article in Plan Sponsor magazine, titled “Statistics of Success” by the nationally recognized ERISA attorney, Fred Reish, posed the salient question: “What are the measures of success for your 401(k) plan?” He then pointed out “There is only one true measure of the success of your 401(k) plan: whether your plan is providing adequate retirement benefits for your participants.”

Reish recommended using three “pillars” on which to build a successful plan. They include: 1) participation levels; 2) deferral rates; and 3) the quality of participant investing.

In order to build each of these pillars, plan fiduciaries must adhere to defined practices in a consistent process.  In some circles this process is called a system.  In others, it’s called a recipe.  Similar to making your favorite chocolate chip cookies, you can’t miss an ingredient and expect to get the same sweet, chewy outcome.  Similarly, companies that manufacture products can’t expect to produce the same quality product if they don’t follow a quality system.  In fact, most corporate purchasers require manufacturers to certify their systems against a standard such as ISO-9000.

Let’s put this into perspective.  While ERISA and the courts don’t mandate specific investment and asset allocation strategies for public pension funds and corporate retirement plans, ERISA and the courts do mandate a prudent process.  For endowments and foundations, recent legislation requires new levels of investment fiduciary care and competence.

Regardless of which entity you serve, you may be wondering then how do I measure success?  And now, to the more poignant question, is there a recipe or a system to help lead our plan to success and ensure protection for our fiduciaries?

Yes there is.  Roland|Criss is helping transform the investment fiduciary community with a system that defines the process, measures success, and reduces risk.

Roland|Criss’ system ensures fiduciary protection by actively training, equipping, and implementing fiduciary best practices for retirement plan sponsors and trust entities.  Roland|Criss does not manage investment assets or sell financial products.  As a result, we are free from fee conflict and serve in an unbiased fiduciary oversight capacity for trustees and trustee committees.

It is important to note that Roland|Criss is the first global organization to assist investment fiduciaries (i.e., Investment Advisors, Investment Stewards, and Investment Managers) acquire a fiduciary identity that conforms to the highest level of conduct – the Global Fiduciary Standard of Excellence.

This approach fulfills Galileo’s mandate to “measure what is measurable and make measurable what is not so.” Now the success of a 401(k) plan can be meaningfully measured with an eye towards the end result—providing participants with adequate retirement benefits and protecting fiduciaries in the process.

Plan Sponsor's Challenges in Today's Environment

"In describing today’s accelerating changes, the media fire blips of unrelated information at us. Experts bury us under mountains of narrowly specialized monographs. Popular forecasters present lists of unrelated trends, without any model to show us their interconnections or the forces likely to reverse them. As a result, change itself comes to be seen as anarchic, even lunatic." Alvin Toffler

With the above in mind, I realized that most plan sponsors must be whipsawed by the current state of anarchy. The tsunami brought about by the 2008 stock market collapse, angry employees, and the Madoff Securities mess,and more recently coming changes in the U.S. Department of Labor's (DOL) regulations on fee disclosure.

Employers are evaluating their plans due to the rule changes and their own business environments. I read a recent industry survey revealing that about 50% of human resource professionals plan to change service providers during 2010 or at least seriously scrutinize their relationships with service providers. That’s startling if one thinks about it. At least half of the plan sponsors are willing to at least consider shaking things up radically because they aren’t happy with their present approach.

Several universal themes emerged from this survey. Virtually all of the plan sponsors that responded will seek to measure their retirement programs’ total costs, participant services, and plan design.

How Should Plan Sponsors Proceed In A Protected Manner? This survey indicates that employers recognize that fiduciary issues are now front and center and will not fade away any time soon. Both in the defined contribution world and in the defined benefit world, the basic questions are being asked by plan sponsors.

Some basic questions are presented below.

• How can sponsors determine if the plan is adequately funded if they have not recently calculated expected inflows and outflows?
• How can employees adequately save unless they also go through a similar type of analysis?
• Can proper monitoring be performed if sponsors and employees do not know what fees are being paid and what services are obtained for the various fees?
• Can investment performance be sufficiently measured if funds are not appropriately compared to the correct peer?
• How can plan sponsors conduct a provider search and selection process that will address their concerns?
• How can they evaluate the responses they receive so at the end of the day, the sponsors don’t have buyer’s remorse and, worse yet, significant liability for breach of fiduciary duty?

To handle these fiduciary landmines, plan sponsors need a coherent process and a framework to perform meaningful evaluation. If they don’t they’ll continue to spin their wheels and bear unwarranted exposure to personal liability. Did I mention that fiduciary liability bears a personal consequence?

The good news is that plan sponsors are paying attention. The challenge for the sponsors is whether they use a model that shows interconnections so they can reverse some potentially negative and anarchic forces that are already in play.

"The art of progress is to preserve order amid change and preserve change amid order." Alfred North Whitehead

Complete Documentation is Vital for Your Protection

I would like to share some insights with you that I obtained while interviewing a former Department of Labor ERISA investigator.  I am sure you can gain value from her experiences. Here is her account of some the violations she uncovered.

My job was to figure out if the various fiduciaries, particularly the plan sponsors' executives, conducted themselves in a “prudent manner” and “solely in the interest of the participants and beneficiaries.“  That was such a nebulous standard, analogous to the late Supreme Court Justice Potter Steward’s description of pornography when he said, "I shall not today attempt further to define the kinds of material but I know it when I see it.”

Eventually, I knew it when I saw it.  Ultimately, I developed a twitch when I didn’t.

When I first began investigating plan sponsors in the early nineties, I remember my supervisor admonishing me to look at transactions to see if they passed the smell test.  When I was new, I often overreacted when:

• Plan sponsors ignored the first letter requesting documents
• Plan sponsors called and requested extensions
• Plan sponsors would not submit what was requested
• Employees would call our help desk and allege conspiracy theories and
• Receiving written responses that were cryptic, too literal or terse.

In most of the above instances, nothing was seriously wrong with the employee benefit plans.  However, I was required to complete limited investigations within three work days or convert the case into an investigation warranting more review.  Then I had no further time requirements other than not to annoy my boss and demonstrate results.  I then became motivated to find something wrong in order to justify that my time was well-spent.  When this happened, I began to chew into plan sponsors’ schedules.  At that point, sponsors often involved their lawyers and other service providers.

The moral of the above is that your initial response to the Department of Labor’s request is critical.

DOL investigators have to make quick decisions about how they will allocate their time.  If they receive complete, well documented adequately labeled responses that address the issue at hand, they can write up their reports and submit it up the food chain and close an investigation in fairly short order.  But if they are forced to request information from executives repeatedly or the explanations provided to their questions seem flimsy, they will expand the scope of the investigation. If they have doubts about how competently sponsors’ employees respond to the investigation, they start questioning their ability to run the plan prudently.

Most people think of themselves as both competent and reasonable. Under the circumstances presented, almost anyone would make the same decisions that they made. But most people also do not have stellar long-term memories.  Most investigations take place several years after the transaction takes place.  Can you remember in detail about decisions you made several years ago? Most likely, your recollections would be hazy.  Unless your decision making process was memorialized contemporaneously, it is easy to question your judgment after the fact as well as your veracity.  Even if the consequences of your decisions do not materialize the way you expect, if you record the analysis and decision making process as events occur, then it is much easier for investigators to put themselves into a fiduciary’s shoes.

I want to interject another word of caution. If the investigation broadens significantly, the Department of Labor does have subpoena authority.  In most instances, this authority has been supported by the courts. The practical implication is that the Department can obtain all documentation surrounding an issue, even internal email or other work products.  The records of your service providers can be obtained by subpoena as well, including their email records.

By imposing discipline on your decision making process and documenting how you arrived at your conclusions as a fiduciary, you will be demonstrating prudence and no one, not even the late Justice Steward could argue otherwise!

Let Roland|Criss help you get prepared for your next Department of Labor audit. Contact me at ronhagan@rolandcriss.com for details.

Fiduciary Solutions

Roland|Criss offers the easiest to use and most effective fiduciary risk management tools available for retirement plan sponsors, public pensions, and foundations.  Get answers to your concerns here.

A Powerful Solution for Pension Trustee Risk Emerges

All public pension plans face risks that could result in situations where employees do not receive promised benefits. Frequently, this is unavoidable due to factors like securities market fluctuations, interest rate changes, liquidity demands, and inflation.

In addition, public pension boards have unique pressures due to the “hothouse” environment in which they operate. Political constituents like lawmakers, local politicians, the media, and citizen groups often try to influence pension policy which can create a lot of distracting noise. If not screened through a quality management system, board members can wind up chasing investment fads with chaos the result.

What may seem to be politically viable is many times downright foolish for pension boards from a risk management viewpoint. This can happen when:

• lawmakers vote to amend plans without following a defined process to evaluate the impact;
• benefit formulas increase obligations without considering demographic trends and available assets;
• rate of return assumptions are increased in order to reduce contributions but windup creating funding shortfalls.

Certain risks are preventable, serve no purpose, should, and can be avoided. A key risk that can be neutralized is governance risk. Governance risks occur when trustees invest plan assets in a way that needlessly under-performs expectations.

The 2000 study by the Association of Public Pension Fund Auditors, titled Public Pension Systems: Statements of Key Investment Risks and Common Practices to Address These Risks, stated “characteristics of poor governance may include incompetence, poorly or improperly defined roles, poor communications, failure to meet fiduciary responsibilities, lack of ethical standards and inconsistency.”

In 2003, this same organization issued its report titled Public Pension Systems-Operational Risk of Defined Benefit and Related Plans and Controls to Mitigate these Risks.  This study described other hazards that many trustees and executive staff of pension boards face. Hazards include:

• board members and executive staff are not adequately trained and qualified to perform their functions and fiduciary responsibilities;
• board members and executive staff do not have the expertise to promulgate policies or operate the public pension plan;
• one or more board members and/or executives may not be independent, thus possessing a conflict of interest, and may not be performing their duties solely for the benefit of retirees and beneficiaries;
• involvement in inconsequential projects, causing critical functions to suffer.

What’s more, all retirement plans, including public pension plans, rely on outside contractors. Pension board members and plan executives are often at the mercy of these contractors when:

• the scope and the object of the contracts are not sufficiently defined;
• due diligence is not performed on major investment vendors and service providers like recordkeepers;
• service providers are not certified to provide fiduciary support services;
• investment vendors, service providers, and/or recordkeepers have conflicts of interest with the plan; and
• trustees fail to monitor investment vendors, service providers, and recordkeepers as defined in fiduciary laws.

In order to combat the potential problems defined in the above mentioned studies, pension boards should ensure that they use a “structured and methodical evaluation process.”

Recently, the Global Fiduciary Standard of Excellence emerged for all pension plans. Substantiated by the Uniform Management of Public Employee Retirement System Act, case law, and industry best practices it is a defined Standard that can help public pension trustees perform safely their investment and fiduciary responsibilities. It defines a management system that ensures safety and quiets detractors.

Roland|Criss trains trustees on the new Standard.  Roland|Criss also developed a system that implements the Standard’s practices and helps avoid relapses.

The initiative to promote pension trustee excellence is governed by the Centre for Fiduciary Excellence (“CEFEX”).  It is a certifying body that provides independent recognition of pension boards that can prove their conformity to the conduct defined by the Standard.  Qualifying pension boards are evaluated based on a structured, methodical process and receive CEFEX’s mark of excellence.  CEFEX selected Roland|Criss to manage its certifications in the United States.

Roland|Criss can assist public pension plans in three ways:

1. deliver training in the practices for which trustees are legally accountable;
2. install a management system that prudently guides investment decisions; and
3. help certify public pension boards against CEFEX’s impeccable fiduciary standard of care.

Plan Sponsors are Being Led on a Dangerous Course

I’ve noticed that vendors who sell products to retirement plans are using the word “fiduciary” a lot lately. Some vendors that publicly acknowledge their fiduciary duty properly educate their clients that a plan sponsor’s liability is much greater than a vendor’s.  A second group of vendors state falsely to their prospects and clients that they act as fiduciaries in place of plan sponsors. A third group of vendors proclaim loudly that they are not fiduciaries at all! How do plan sponsors make sense of this and what does it mean to them?

The Employment Retirement Income Security Act of 1974 (“ERISA”) defines a fiduciary to the extent that a person does any of the following:

1. Exercises any discretionary authority or control over the management of a plan, or management or disposition of plan assets;
2. Renders investment advice for a fee or other compensation, direct or indirect, over the disposition of plan assets, or has any authority or responsibility to do so; and
3. Has any discretionary authority or discretionary responsibility in the administration of such plan.

It should be obvious from the above definition, more than one person or entity can be a fiduciary at any one time. Normally, plans have several different fiduciaries. These include both insiders, such as company officers and plan committee members, as well as outsiders such as registered investment professionals. Where it is unclear if a person is a fiduciary, the courts apply a functional test under ERISA.  Persons in certain positions, however, such as the company employee who serves as the named fiduciary, trustee and plan administrator, are automatically considered fiduciaries.  Their liability may be shared by others but it cannot be off-loaded!

Frequently, corporate employers are confused about their fiduciary responsibilities. Some believe that once they hire investment advisors and investment managers, they no longer have further fiduciary responsibilities. This is simply not true!  The buck always stops with a plan sponsor’s key managers.

Another fallacy is the widespread belief that fiduciary duty focuses just on investment matters. Fiduciary duty under ERISA also involves many governance matters, claims administration, communicating with participants, as well as preparing required notices and disclosure to participants.

We hear from executives all over the country who are stunned to find that they are held legally liable to a set of fiduciary practices.  By increasing numbers, they are outraged that no one has made them aware of how to fulfill these practices.  They are learning that service providers are not on the hook for a plan sponsor’s fiduciary liability.  As a result, many of your peers want clarity from a truly independent source and are calling for unbiased fiduciary training and tools to satisfy their duties.

Quoted below are the actual claims made in recently filed lawsuits against executives like you:

• Participants incurred unreasonable fees and expenses.
• Fiduciaries caused the retirement plan to enter into agreements with third parties that charged excessive fees.
• Fiduciaries failed to inform themselves, understand, and monitor the various methods by which providers received payment and other revenue sharing arrangements.
• Fiduciaries failed to establish, implement, and follow plan oversight procedures.
• Fiduciaries failed to oversee the performance of co-fiduciaries.
• Fiduciaries were not entitled to the safe harbor protections of ERISA section 404(c).

For more clarity on your fiduciary duties and how to determine your exposure to liability, you may request a complimentary white paper entitled “Improve Your Pension Governance – Learn Where You Stand”.  Through the use of actual plan sponsor cases, the white paper demonstrates how Roland|Criss’ fiduciary governance system increases fiduciary protection on a before-and-after basis.  Click here to request a copy of the white paper.