What You Should Know If You’re A Fiduciary

If you serve on your employer's retirement plan committee, or if you serve on the board of a foundation or endowment, are you aware of the full scope of your fiduciary responsibilities?

The agencies and rules that define and govern fiduciary activities are a virtual alphabet soup of ever-evolving regulations. A plethora of rules, including the Employment Retirement Income Security Act (ERISA), Uniform Prudent Investor Act (UPIA), Uniform Prudent Management of Institutional Funds Act (UPMIFA), and the Department of Labor (DOL), govern the fiduciary responsibility of employer-sponsored retirement plans, institutional investments, trust assets, and health plans.

Pension plan and 401(k) plan sponsors and those charged with investment oversight of foundations and endowments need to be serious about their fiduciary obligations. Simply put, the obligation for managing a plan or investment doesn't end when you write the check. It begins. As a fiduciary, you are a steward that takes on the responsibility of ensuring that funds are managed in the best interest of plan participants or the beneficiaries of your foundation or endowment. Employers and institutions cannot outsource their fiduciary responsibilities in totality and can be held liable for any alleged violations. 

Common fiduciary failures include:

  • Costs which bear no relevance to the value provided;
  • Conflicts of interest;
  • Continual investment underperformance;
  • Inadequate disclosure;
  • Defective plan design, and;
  • Insufficient participant education

Financial missteps, even those that are completely unintentional, can have serious consequences. One only need to look at law suits in recent years to see the increasing number of 401k fiduciary breach lawsuits regarding excessive fees. For example, after a nine year legal battle, Boeing settled a suit for $57 million. More recently, suits have been filed against non-profit organizations like M.I.T., N.Y.U., and Yale over retirement plan fees and we’re just starting to see a call for similar lawsuits against pension plans.

Even if an organization manages to escape fines, there are legal costs and reputational impacts to consider. In fact, an organization can face reputational risk without a lawsuit. The media does not shy away from reporting on high-fee, underperforming investment practices. One recent report by Business Insider highlighted that $1 trillion of public pensions and endowment funds are invested in hedge funds, a vehicle that is fraught with underperformance and high fees (management fees alone on that $1 trillion investment are estimated at $20 billion).

Not taking a fiduciary responsibility seriously can lead to learning a costly and painful lesson at the hands of the DOL, your State Attorneys’ General Office and most concerning, the plaintiffs’ bar. Keep in mind that a breach of fiduciary duty may result in personal legal liability.

If you are serving in a fiduciary capacity, ensure you understand why each investment and each service provider was selected and are aware of every fee and all compensation paid to service providers—especially any revenue sharing payments. That means doing your research and demanding answers. Not only is it your right to understand each component and cost of a particular plan or investment—it is your duty.  Among other things, that means understanding why each plan or investment component was selected, what alternatives were considered, and the make-up of every charge, fee, discount, and revenue share.

For all plan types, benchmarking, provided by an independent source can be an effective way to get insight to comparable plans or investments.

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