Roland|Criss Blog

Buyer Beware

by Ron W. Hagan

In a recent article appearing in CFO.com, Jeff Mamorsky revealed a surprising development that could change the game for multi-employer plans ("MEP").  Highlighted in this revelation was the report by the Department of Labor ("DOL") indicating that MEPs may not satisfy the requirements of ERISA if there is not a sufficient "connection" between the plan sponsor and the participating employers.

The term "connection" is thoroughly defined in the article.  In summary, it is a relationship "between an employer and employee that participate in the plan by some common economic benefit or representation interest or genuine relationship unrelated to the provision of benefits."  This could challenge the arrangements between a professional employer organization ("PEO") and its co-employer clients.

While it seems that the DOL is preparing to tighten the belt on its definition of the business relationship between service provider and co-employers (or participating employers) in a MEP, the bigger picture and heavier weight of burden has to do with the DOL's concern that participating employers are engaging in MEPs to relieve themselves of ERISA fiduciary responsibility. 

Fiduciary Protections that Fail in the Courtroom

There are many business models in the retirement plan industry that claim to offer fiduciary protection.  Very few vendors' claims of such protection are surviving tests in cases involving breaches of fiduciary duty against plans sponsors.  And rarely do plan administrators test the validity and functionality of these providers' claims.  In particular, there are many PEOs that promote their version of fiduciary protection with words like...diminish, reduce, eliminate fiduciary liability...for their co-employer clients. It is this claim that gives us great pain, for both the PEO and the co-employer. 

Sowing the Wind to Reap a Whirlwind

I just read about another conflicted service provider that offers TPA, recordkeeping, and investment advice services, promoting its great victory in landing thousands of small employers.  It's main pitch to the market is its ability to offer a retirement program to these employers "without their incurring any plan sponsor or fiduciary liability."  This was released just 10 days after the article appeared in CFO.com.

Is anyone reading this stuff? Does anyone care?  Co-employers will, of course, eventually care. 

The Good Guys Still Wear White Hats

With that said, there are PEOs that work very well for their clients.  But they are also the ones that do not deceive their clients. They disclose the fact that the co-employer maintains the fiduciary responsibility to prudently select and monitor the performance of the PEO in accordance with best-practice standards.  These PEOs equip their clients with ways to monitor them; objective and transparent proof, not deception.

Ironically, the retirement plan service providers (PEOs included) are all too willing to provide a myriad of services that they have defined and developed, while also unable and unwilling to offer the one thing their clients need the most.  If you'd like to know more about that one thing, please click here.

When the Stock Market Crashes, What Should a Fiduciary Do?

by Ron W. Hagan

If you are like most retirement plan and foundation executives who have contacted us in August, you have probably been overwhelmed with "breaking news" emails and cable news commentary about the stock market's reaction to the shakiness of the U.S. economy. With this much news, especially adverse in nature, it is easy to swing on a pendulum from over indulgence on one end, to a mental callous on the other. How do these short term market fluctuations, as well as longer term forecasts, impact fiduciary decisions, and conduct? Now, let's bring it on point relative to your role, a member of an executive team responsible for the oversight of pension assets or a non-profit board accountable for donor contributions. How do these short term market fluctuations, as well as longer term forecasts, impact fiduciary decisions, and conduct? While this is a broad and deep question, the answer is a relatively straight forward one, but not necessarily an easy one. Fortunately for us who sit in the fiduciary chair, the boundaries of liability are established. If we stay in those borders and exercise faithfully in our roles, we will be fit and prepared to handle whatever comes our way. If we remain dedicated to the disciplines and workflow processes, we can trust that the fiduciary outcomes will exceed expectations and legal requirements. While this doesn't eradicate the sting of the market losses, it does provide the confident peace of mind that the hand is at the wheel and the assurance that you have not missed anything. One of our clients said it very well when he stated, "my fiduciary concern is not tied to what I know or what I am doing, but my anxiety is created by what I don't know or what we aren't doing." Maintain high proficiency in the disciplines of fiduciary duty; governance, administration, investments, and controls, and trust the disciplines. It builds the fiduciary muscle to endure and persevere in your role. Roland|Criss has a program to help you achieve a greater awareness of the fiduciary disciplines. Contact any one of our senior professionals.

Caught in the Middle

 by Ronald E. Hagan
CEO -  Roland|Criss

The financial consulting industry is embroiled in an internal fight.  At issue is the national effort to make all investment advisors legally required to put their clients' interests first.  In other words, to make all financial consultants accountable as fiduciaries.

Insurance companies and securities brokerage firms oppose strongly the fiduciary requirement.  They argue that a fiduciary standard covering all insurance agents, mutual fund brokers, bond brokers, pension consultants, and the like would only increase their costs.  They imply that the costs would be passed on to retirement plans, foundations, and retail clients.

Under today's rules, investment consultants may receive both direct and indirect financial benefits from investment product sources like mutual fund companies and insurance annuity issuers.  These benefits influence consultants' recommendations.

If they were held to fiduciary accountability, financial consultants would not be able to factor their income into their recommendations.  The tendency to color advice based on which product sources pay advisors the most income is, however, pervasive.  Even consultants that are registered under the Investment Advisers Act of 1940, which imputes to them a fiduciary duty to their clients, are able to skirt that law and receive extra money rewards.

The widespread opposition among financial consultants to a universal fiduciary standard for all investment vendors tears the cover off the trusted advisor concept.  This is bad news for those caught in the middle such as retirement plan sponsors, endowments, foundations, and private trusts.  The fiduciary laws to which they are accountable provide no relief from the duty to put the interests of their retirement plans' participants, charitable donors, and beneficiaries first.  Given the extent to which duty bound fiduciaries rely on investment "professionals" for the tough decisions they face, it seems only right that advisors who enrich themselves at the expense of trusting clients should get in the middle, too!

Carrying The Stone

by Ron W. Hagan
Executive Vice President - Roland|Criss

I just read an invitation from a service provider promoting an event for 403(b) retirement plan sponsors.  This one is no different than the growing number of events hosted by providers to “help” plan fiduciaries understand their NEW fiduciary duty and help “mitigate” fiduciary liability. 

Don’t get me wrong, spreading the message of the need for high quality fiduciary practices is essential to fulfilling ERISA’s mandate to operate retirement plans in the exclusive interest of the participants.  Contrary to the idea advanced by many service providers, however, these practices have always been required of fiduciaries.  There is nothing new.

We’ve been committed to carrying the stone for plan fiduciaries for the last 25 years.  So why are service providers just now talking about mitigating your liability?  It’s because you are beginning to ask for more disclosures of their work and fees.

From our vantage point, organizational leaders and managers are asking for help; help in shoring up their gaps in knowledge, experience, and processes.  Their authentic pursuit of best practices fuels our firm’s associates’ passion to create the next great “TQM” movement.

There is a void in most all retirement plans; the void is the lack of certainty that critical processes are being executed well and in accordance with ERISA’s requirements.  It could exist in your plan as well.  Incidentally, just try to get one of your retirement plan’s current vendors to certify that your fiduciary system complies with ERISA!  My bet is that in spite of their posturing, they can’t do it and won’t.

Newsflash: Service providers cannot takeover your liabilities.  Furthermore, so-called “investment fiduciaries”, which includes investment advisors, are not liable for anything that is not specified in their contract.  Here’s an example of how this can trick plan sponsors into thinking they are getting something important when they actually get nothing at all.

A financial consultant registered under the Investment Advisers Act of 1940 is automatically a fiduciary to any and all of its clients.  They would include private individuals, corporations, and so on.  The fact that the consultant is a fiduciary under that Act does not make it an ERISA fiduciary.  In order for a plan sponsor to get the benefit of having an “investment fiduciary” on their plan, the consultant’s contract needs to acknowledge that it is an ERISA fiduciary, too.  Most of the hundreds of investment consultants we’ve encountered imply ERISA status when they actually avoid it with a vengeance.  If you rely on a financial consultant for “”fiduciary services,” you may want to check their contract again.

Getting rid of the uncertainty is easy.  Roland|Criss is fully devoted to aligning plan sponsors with ERISA.  We inspect agreements, scopes of services, and legal accountabilities.  Since we offer no other services, our opinions are unbiased and impartial.

Keep pressing in!  In order to succeed, plan fiduciaries need to think in terms of workflow process, focus and experience, and possibly the most important requirement, eradication of conflicts of interest.

Join us in the movement for fiduciary excellence.

Hoodwinked

by Ron W. Hagan
Executive Vice President - Roland|Criss

Have you ever been influenced slyly by someone who feigned good intentions only to cheat you out of your hard earned money or your perception of value?

Maybe you didn’t end up getting as much as you thought you’d get for that car you traded in. Or maybe that vacation wasn’t as “all inclusive” as the sales person promised.

Being cheated, beguiled, bamboozled and duped stings doesn’t it?  While it’s a blow to the mind, it has an even sharper edge to the heart.  As I think through this, it’s one thing to make a mistake; the human mind will adapt and learn how to avoid such a blunder in the future. However, the heart can quickly distrust.  Overcoming broken trust is a much different process and has wide scale ramifications in the world of financial stewardship.

Where am I going with this anyway? In our independent fiduciary business, we are known for making retirement systems and charitable organizations safer places for putting money.  We do this by testing intensions, evaluating decision making processes, and determining the fairness of the fees that are charged to investors who don’t know how to discover these on their own.  It is a wildly purposeful mission.  

Excelling as a fiduciary requires that you persist in pursuing the best; to not waver in pressing in to what is right on behalf of those who are depending upon you.  In our capacity, it is highly rewarding to help interpret and define the difference between what is best from what is deceptive. In the investment industry, these lines are very murky.

Fiduciary Yardsticks

by Ron W. Hagan
Executive Vice President - Roland|Criss

Renowned big thinker and trusted management guide, Peter Drucker, wrote, “Each institution will be the stronger the more clearly it defines its objectives.”  He further stated, “It will be more effective the more yardsticks and measurements there are against which its performance can be appraised.”

In the realm of stewardship, such as boards of directors, retirement plan committees, and foundation investment committees, how do we follow the guidance of Mr. Drucker?  Is it possible to meet objectives if none are conceived, thought through, and owned?

Is it possible that in these fiduciary environments our attention has been diverted?  Intentional or not, many governing bodies find themselves in a strategic quandary; reviewing and monitoring information that has no connecting point to stated objectives. 

This happens in board rooms across the country, typically around investment related matters where third party consultants are relied upon to define and measure performance for board and committee members.  In this scenario the fiduciaries’ efforts are analogous to flying a kite without a string.  There is no connection.

In these days, when the word 'fiduciary' has seen more play time, air time, and court time than the last 100 years combined, it might well be worth the time for boards and fiduciary committees to devise agame plan to determine their objectives.  And, of course, I would be remiss if I did not suggest that you get some coaching that is based on a proven track record. 

If Peter Drucker were with us today, he might very well conclude our conversation with his question: “Are your performance yardsticks appropriate to your objectives?”

We can help you.

It’s Not Only Stupid, It’s Dangerous.

by Ronald E. Hagan 
CEO, Roland|Criss

 

The results of an eye-popping survey* conducted by consumer groups, financial planning organizations, and an association of states’ securities regulators were announced this week.  The survey revealed that investors are oblivious to the vast differences in legal standards among the various classes of “investment advisors.”

  

 What’s wrong with this picture?  While nearly all of the respondents (97%) believe that stockbrokers, investment advisors that serve pension plans and foundations, and insurance agents should put investors’ interests first (the “fiduciary duty”), very few of them said they know that various laws say otherwise.

  

For example, sixty percent of the investors surveyed said they thought insurance agents had to uphold a fiduciary duty, which isn’t true, even though ninety-six percent said the fiduciary requirement should include insurance agents that sell annuity-based products.  (It’s no surprise that insurance agents are the most outspoken opponents of the government’s current effort to make a universal fiduciary standard apply to all investment advice givers.)

 

More Evidence of Confusion

 

Thirty-four percent of the investors surveyed believe that investment advice is the number one service provided by stockbrokers.  The law under which stockbrokers are licensed defines their primary role, however, as buying and selling stocks and other securities, with no requirement that they place their clients’ interests first; no fiduciary duty here!

 

Seventy-seven percent of respondents admitted they knew that registered investment advisers ("RIA") are licensed under a federal fiduciary standard.  Most respondents did not realize, however, that RIAs’ can escape consequences if they can get their clients to retain “full discretion” over investment decisions.  (This is the common practice among RIAs in the pension and foundation arenas.)

 

The Laws are Stupid and Dangerous

 

The survey proves what many experts in fiduciary standards already knew…investors have been bewitched by unfair sales tactics and bewildered by contradictory claims made by competing investment advice providers.  When the truth emerges, many investors feel stupid…some even angry.  Investors are not stupid, though.  The same cannot be said about the laws that empower stockbrokers, RIAs, and insurance agents to ply their trade.  Not only are the laws stupid, they are dangerous.  The danger lies in the widespread, but wrong assumption held by many pension and foundation executives that their investment advisor carries the fiduciary burden.  Many executives are finding out about the error in their assumption, the hard way.

 

Here’s How You Can Make Your Fiduciary Job Safer

 

In January 2011, the U.S. Securities and Exchange Commission will appear before the U.S. Congress to ask for an addition to the new financial services law.  The SEC wants a universal fiduciary standard to be added to the law.  The amendment will embrace any person or firm that delivers investment advice; pension consultants, RIAs, stockbrokers, insurance agents, and financial planners.

 

As you might guess, the investment advice providers are up in arms over the SEC’s initiative.  They have been fighting for position for months.  Pension plan sponsors and foundations have been mostly silent.  Why?  There are two likely reasons: (1) the vast majority of investment advisors benefit from the current state of confusion among investors and are content to let their clients' remain out of touch with the fiduciary debate, and (2) the fiduciary interests of plan sponsors and foundations are not well represented at the regulatory level.

 

You should be counted on this issue.  Send a comment to me on this Blog and I will see to it that your voice is heard when the Congress begins debating the issue.

 

*The Survey

Conducted by Infogroup Inc., which provides market research services, the survey tested the reactions of nearly 1,400 people that defined themselves as investors.  The survey’s sponsors included AARP, CFA, Certified Financial Planner Board of Standards, Inc., Financial Planning Association, Investment Adviser Association, National Association of Personal Financial Advisors, and the North American Securities Administrators Association, which developed the Uniform Prudent Investor Act (“UPIA”).

Getting Ready for the DOL’s New Fee Disclosure Rule: A To-Do List for ERISA Plan Sponsors

by Ronald E. Hagan
CEO, Roland|Criss

Some ERISA pension plan sponsors are preparing for their first compliance audits under the Department of Labor’s new Regulation 408(b)(2).  So far, the picture is not pretty.

 

The Regulation requires mutual fund companies, hedge fund managers, investment advisors (they use a variety of titles like pension consultant, financial advisor, and insurance agent), third party administrators, and other “covered service providers” to disclose their fees in more detail to ERISA plan sponsors than ever before.

 

For their part, executives that manage their companies’ pension plans are required to analyze the fee disclosures and judge if they are reasonable.  Since the consequence for not complying with the Regulation is severe, a yearly audit conducted by a firm accredited to conduct such audits, which does not provide any of the services listed above including a plan’s financial audit, is essential.

 

Based on what I’ve seen up to now, ERISA plan sponsors are in for a tough time meeting the Regulation’s requirement.  Nine out of ten ERISA plans that Roland|Criss has seen have no plan for (or idea on) how to figure out if the fees they pay their service providers are reasonable.

 

If the early results are any indication of the state of affairs across the ERISA community, then executives that serve as their companies’ pension fiduciaries need a refresher on how to check their vendors’ fee arrangements.  Here is a quick-reference to-do list for ERISA plan sponsor fiduciaries:

 

1.    Locate your original file copies of contracts with all vendors (a simple, but often difficult task, especially if you’ve been working with the same vendors for years);

2.    Calculate the fees that are deducted from plan assets to pay service providers (and if you don’t know how, call an independent third party to help you);

3.    Work to segregate the information that your service providers are providing you between information that really reports on their fee structure, and just investment returns or other superfluous reports;

4.    Identify whether you are utilizing one vendor for multiple services and thus are subject to potentially damaging conflicts of interest (this is a really big legal problem for ERISA fiduciaries); and

5.    Track and record how and when you evaluated the quality of your vendors' services against the fees paid in order to minimize your legal risk.

 

It doesn’t take much imagination to see that a lot of companies that sponsor ERISA pension plans have not been given the tools to understand how to check their vendors’ arrangements, or have not seen the importance in doing so.  The new regulation prompts all ERISA pension fiduciaries to learn (and quickly!) how to understand fee disclosures and prove that vendors’ fees are reasonable.  

The Accidental Fiduciary

POINT OF VIEW:  How a Professional Fiduciary Sees It 

by Ronald E. Hagan
CEO, Roland|Criss

One morning my phone rang and the caller was the chairperson of his company's committee that oversees its 401(k) and defined benefit pension plans.  He explained how his committee's members were trying to clear up confusion about which of their service providers were actually on the hook as fiduciaries to the plans.

Concerns developed when a member of the committee realized recently that one of the plans' pension consulting firms was not a fiduciary under the Employee Retirement Income Security Act ("ERISA") because it would not accept ERISA's designation as an "investment manager."  While the consultant disclosed that it was a fiduciary under federal securities law, its refusal to accept ERISA's fiduciary definition left the committee lacking protection it thought it had hired.  (The key threat of litigation for the committee members is based on ERISA, not securities laws.)

The situation led the group to question what their vendors' "co-fiduciary" claims were actually worth.  The unfortunate thing about the committee's dilemma is that ERISA plan sponsors were never intended to "carry the stone" for such matters in the first place.  When the caller asked for my opinion, I had this to say to him.

The Intended Fiduciary Model

When enacted into law, ERISA expected that employee benefit plans qualified under its rules would be managed by professional fiduciary organizations; not by the businesses that sponsored them.  In other words, 401(k) plans, ESOPs, defined benefit plans, and other ERISA programs were to be turned over to highly specialized firms that did nothing else but carry the fiduciary stone.  These outsourced fiduciaries discharge a plan sponsor's responsibility and risk.  They hire and fire service providers, ensure that fees deducted from workers' accounts are proper, and are equipped to go toe-to-toe with anyone that has interests that conflict with the duty of exclusive loyalty to participants.  The intended model never expected that a plan sponsor's directors, executives, and managers would be put in harm's way.  Unfortunately for the executive who called me, his committee was unaware of ERISA's intention and was operating in do-it-yourself mode.  Their situation is all too common.  It makes many executives "accidental fiduciaries."

The Unintended Consequences

The caller's committee's approach has it dazed and confused about how to be sure it satisfies ERISA's rules for service provider selection and monitoring; conflicts of interest resolution; investment selection and monitoring; and earning the exemption from liability for bad investment decisions made by the plans' participants.  The plan sponsor's decision to put the responsible party tag on each committee member left them to figure out on their own the fiduciary claims of the investment firms, outside trustees, custodians, and administration vendors that serviced the plans.  All in all a tall order for accidental fiduciaries.

A License Alone Doesn't Make a Good Plumber

The caller's situation reminds me of the plumber that I called to fix a slow drain in my shower.  Wanting to do the right thing, I was sure to call only a licensed plumber.  The candidate looked at the situation and told me that my "P-trap" was broken.  He said it was it was embedded in concrete and the work to fix it would be major.  His quote to fix it was $5,000.  Naturally, I was shocked and wondered how such a repair could cost so much, but, hey, the guy was licensed so I thought he must be right.

Just as I was about to call and give him the green light to proceed, a friend of mine, who manages big commercial buildings, called me.  After telling him about the plumber's diagnosis and cost estimate, he told me to wait for a couple of days.  He sent one of his men to see the problem and came up with a completely different diagnosis and cure.  I told him to proceed immediately, which he did.  He fixed the problem in less than an hour at a total cost of only $175.  If I had not encountered my friend who works with plumbers every day, I probably would never have known that I paid for a P-trap that I didn't even need.

As I told the pension executive who called me, don't be misled by every fiduciary claim made by vendors to whom the word "fiduciary" barely applies, if at all.  Hire a professional who works with "plumbers" every day.  It's not too late!  learn more>

 

Is the Fox Selling Chicken Wire to the Hen House?

Ronald E. Hagan
CEO, Roland|Criss

The overarching job of the board of directors of a company that sponsors a retirement plan is to ensure a safe environment for its employees' nest eggs.  Most executives that directly oversee such plans want help performing the duties defined by various laws, court cases, and industry best practices.  In the past, board members, financial executives, and human resource managers that serve as pension fiduciaries have looked to providers of investment products and advice as their “trusted advisor” for such help.

In truth, investment providers do not all deserve the same level of confident reliance as trusted advisors.  For example, insurance companies are not legally bound to comply with any defined fiduciary law.  The same is true of securities firms that sell stocks, bonds, and mutual funds.  Only investment providers that are licensed as Registered Investment Advisors bear any semblance of accountability to a fiduciary standard of care.

This is important; a Registered Investment Advisor’s inherent accountability is to a specific securities law, but not to any pension law.  Many executives who manage retirement plans are easily misled into thinking that a Registered Investment Advisor is a “co-fiduciary.”  Such thinking has caused thousands of primary fiduciaries to believe that they are relieved of their investment decision making risk just because an advisor claims co-fiduciary status, when nothing could be further from the truth.  Scores of court cases in this decade prove it.

Last week’s decision in the U.S. Senate to trash a proposed rule that would have placed all investment providers under a common fiduciary roof is bad news for retirement plan sponsors.  The rule would have imposed on insurance agents, stock brokers, and Registered Investment Advisors alike, a pension connected fiduciary standard.

The financial reform package introduced last week by Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, dropped an earlier provision that would have imposed a fiduciary duty on anyone offering advice on investments, dealing a blow to boards of directors, financial officers, and human resource executives.  After studying the arguments that led to Senator Dodd’s decision, it is clear that misleading arguments put forth by the insurance industry caused him to back off.  What does this mean for you?

You need to evaluate the practices and influence that your plan’s investment provider exerts on your decision making.  The provider may be an insurance company, a Wall Street securities firm, a Registered Investment Advisor, or even a third party administrator.  The U.S. Senate just gave all of them a permanent license to keep making chicken wire for your hen house!

The holes in the chicken wire are easily identified by a firm that audits investment firms.  Just be sure you don’t employ an investment firm for the task.  The safety of the nest eggs you are responsible for is at stake.  Federal pension law puts your personal net worth on the line, too.