“Fiduciary” is a word used frequently in the retirement industry, often to the confusion of plan sponsors and participants. “We have a fiduciary,” some employers tell me when we sit down to talk about their plan. “I am a fiduciary, and I have a fiduciary,” others will say. “We were issued a fiduciary warranty by our provider.” And so forth.
That’s how our discussions on fiduciaries often begin. When we dig in to the specifics of the financial services their hired “fiduciary” offers (and does not offer), many employers are surprised to learn that – contrary to what they were led to believe – their fiduciary does not reduce their responsibility or potential personal liability for selecting or monitoring the investments in their company’s retirement plan.
Without going too far down the technical rabbit hole, saying you have a fiduciary guarding your retirement plan is a bit like saying you have a dog guarding your house. The analogy is less of a stretch than you may think, considering that Fido – a well-known name for guard dogs – is linguistically related to “fiduciary.” Taken from Latin, fido means “to trust, believe, confide in.”
A good fiduciary will be like a good guard dog in some respects: loyal first and foremost, on alert, highly trained and so forth. In a more technical and legal sense, fiduciaries put the best interests of clients first. They should not have any conflicts of interests. This includes not receiving variable fees or commissions from investments they recommend. Such compensation by its nature could influence them to make suggestions not in the best interests of their client.
The range of financial services provided by an advisor who uses the word fiduciary can vary wildly – just as wildly as the variation between dog breeds. Many dog owners can accurately identify the breed of their dog, but fewer plan sponsors can accurately identify the breed of their fiduciary! Many employers are under the impression that they have a German Shepherd guarding their plan, so to speak, when instead they have a Chihuahua. This is not unexpected, however, given how quickly the word “fiduciary” is sometimes used.
For example, in most cases fiduciary services do not actually relieve employers of any responsibility or potential personal liability. Mutual fund companies, insurance products and even advisors may generally speak of their attention to fiduciary standards, but that does not normally mean they will fulfill one of the plan sponsor’s fiduciary obligations.
The word “fiduciary” becomes most tricky in the context of investment “advice.” What is advice, exactly? Is advice recommending something that is “suitable,” but not technically in someone’s best interests? When it comes to advice, brokers and insurance salespeople have historically been held to a lower “suitability” standard. For this reason, employers cannot expect them to provide recommendations that are in the best interests of the company and plan participants.
By comparison, a Registered Investment Advisor (RIA) is held to the higher “best interests” fiduciary standard. But again, a RIA does not relieve employers of any responsibility or potential personal liability unless he or she agrees to perform a fiduciary role or roles in writing. Contrary to what too many employers believe, working with someone who is adhering to the fiduciary standard does not mean the plan sponsor’s own responsibility or potential personal liability is reduced.
To help you identify the “breed” of your fiduciary and whether your own responsibility is lessened, we provide the following brief descriptions of four fiduciary roles:
- No fiduciary: The broker, sales person or advisor does not commit to the performance of a fiduciary role in writing. Consequently, the employer retains full responsibility and potential personal liability for the plan’s management.
- ERISA Section 3(21) “co-fiduciary”: The advisor commits in writing to meet the fiduciary standard in providing investment recommendations to the employer, but does not replace the employer in making investment decisions or assume sole responsibility for them. The employer still bears the responsibility and potential liability for such decisions.
- ERISA Section 3(38) fiduciary investment manager: The advisor commits in writing to accept delegation from the employer to fulfill the employer’s responsibility of making investment decisions and monitoring plan investments, relieving the employer of the responsibility and potential liability for those roles.
- ERISA 3(38) “light” fiduciary: Beware of those who suggest they provide “services” under ERISA Section 3(38). The nature of their services varies, but generally, it involves performing investment analysis to assist in investment decisions. Much like when hiring a 3(21) co-fiduciary, however, the employer remains responsible for investment selection and monitoring.
The Department of Labor aims to narrow the gap among advisors with a new Fiduciary Standard (now scheduled to take effect April 2017). However, employers should not fall into a false sense of security. They should always remember that simply hiring a fiduciary – even one that promises adherence to fiduciary standards – does not mean their responsibility and liability are reduced. They must still read the fine print, and examine the specific roles their fiduciary commits to perform in writing, to ensure their fiduciary is not toothless when it comes to mitigating their own risk.
Canine humor aside, there is much more to unpack regarding the nature of fiduciary support. I’d love to help you understand more about your plan’s fiduciary options. Let’s meet for a quick chat!