The words most associated with fiduciary responsibility are prudence, trust, duty, and loyalty. Fundamentally, these words describe acts wholly aligned with putting the client’s interests first.
There seems to be plenty of evidence that the Employee Retirement Income Security Act of 1974 (ERISA) and the U.S. Department of Labor’s (DOL) most recent fiduciary clarification are modeled after trust law. Indeed, with respect to the fiduciary standard of care, trust law can go to a place where contract law cannot. Perhaps the two can be differentiated by one fundamental distinction: behavior vs outcome.
It is noted in ERISA: §1103. Establishment of Trust; (a) Benefit Plan Assets to Be Held in Trust; Authority of Trustees
In addition, the employer sponsor and its administrator admit the plan’s funding and benefit arrangement, at the very least, is that of a trust in the form 5500 which is necessary to satisfy annual reporting requirements (Section 9a & 9b).
Furthermore, it can be argued that there is a hint of “trust-like” obligation via the mandated surety bond which guarantees the faithful performance of duties.
Clarity will materialize if there is an admission that a trust relationship exists and yet this is rarely evidenced in class action filings, arguments by most of the financial services industry, and politicians. A trust relationship immediately becomes apparent by the duties owed to the beneficiary of the asset by the trustee or to parallel, the duties owed to the participant by the fiduciaries of the employer sponsor.
In a trust or fiduciary relationship, investment options and partnerships must be maintained and/or chosen with transparency and be free of conflicts of interests. For simplification purposes, there must be visibility in both content and oversight.
◦Content may be defined as investment options and its associated performance, costs, commissions, and fees.
◦Oversight may be defined as the fiduciary’s obligation to monitor the performance and behavior of all partnerships, including administrator, recordkeeper, auditor, attorney, investment advisor, money manager, and all parties where there has been a noted fiduciary transfer of duties.
Confusion between the two is often seen in legal filings. For example, did the breach occur because the investment options performed poorly or because no one was monitoring who chose them? Were the recordkeeper’s fees unreasonable or was there a lack of oversight in choosing and monitoring the chosen recordkeeper? Was there guidance and consistency in the Summary Plan Description?
A visible methodology is required for content and oversight, and yet, how can such a methodology be evidenced other than with the proper use of the interdependent components of various financial technologies (this is yet another article)?
As I read numerous articles and pour through many class actions lawsuits, I wonder if the legal community is too focused on contractual and common law and the financial services industry focused on a transaction-based business model. It can be argued that long-term professional cultural bias can inhibit the development of the necessary skill sets required for subject matter mastery. Fiduciary law is trust law. Accept it.
Neal Shikes has been a Registered Financial Services Industry professional for over 20 years and a Chartered Retirement Planning Counselor, CRPC®. He is also the “Willing Fiduciary” (http://willingfiduciary.com/) associated with Counsel Fiduciary LLC (http://counselfiduciary.com/) and a principal associate for Thornapple Associates a provider of Expert Witness Services (http://thornapple.net/).