Willing Fiduciary

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Category: Department of Labor (Page 1 of 2)

Questioning 401k Lawsuits Based on Investment Outcomes


Investment results are outcomes. No one can predict the excess return relative to a benchmark (Alpha) that is usually associated with active investment management. Then it should come as no surprise that no one can predict the market as a whole (beta). Choosing investments is a subjective endeavor.

So why are so many legal actions and allegations against Employer Retirement Plans Sponsored Plans based on subjective endeavors with unknown outcomes? Even via an appeal, the judge will allow the journey to the door but, without the keys, will never allow the door to be opened.

Loyalty and prudence is demonstrated in the behavior and methodology of the fiduciary and judges have no compunction in stating this:

“However, a plan fiduciary’s actions should “not be judged ‘from the vantage point of hindsight.'” Chao v. Merino, 452 F.3d 174 , 182 (2d Cir. 2006) (quoting Katsaros v. Cody, 744 F.2d 270 , 279 (2d Cir. 1084). Cf. Pension Benefit, 712 F.3d at 716 (noting that the “prudent person” standard “focus[es] on a fiduciary’s conduct in arriving at an investment decision, not on its results, and ask[s] whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment”) (quoting In re Unisys Sav. Plan Litig., 74 F.3d 420 , 434 (3rd Cir. 1996). “[S]o long as the ‘prudent person’ standard is met, ERISA does not impose a ‘duty to take any particular course of action if another approach seems preferable.” Chao, 452 F.3d at 182 . “A court should not find that a fiduciary acted imprudently in violation of ERISA 404(a)(1)(B) [*7] merely because, with the benefit of hindsight, a different decision might have turned out better.” Osberg, 138 F. Supp. 3d at 552 . In Leber v. CitiGroup 401(k) Plan Investment Committee,129 F. Supp. 3d 4 , 14 (S.D.N.Y. 2015), the court recognized thatSection 404 of ERISA “focuses on a fiduciary’s conduct in arriving at an investment decision, not on its results, and asks whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment.” (https://www.bloomberglaw.com/public/desktop/document/Troudt_v_Oracle_Corp_No_116cv00175REBCBS_2017_BL_47916_D_Colo_Feb?1490618456)

Hidden in the message is a description of a fiduciary acting in compliance and the skillset required to do so:

“..a fiduciary’s compliance with the prudent-man standard requires that the fiduciary give “appropriate consideration” to whether an investment “is reasonably designed, as part of the portfolio . . . to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment.” Accordingly, the prudence of each investment is not assessed in isolation but, rather, as the investment relates to the portfolio as a whole.”

The judge is trying to tell everyone how the coin should be forged but no one seems to be listening.

Heads-The ability to provide visible evidence of a methodology that demonstrates portfolio management skills that improves the likelihood of the participants reaching their retirement objectives.

Tails-The lack of visible methodology that demonstrates portfolio management skills that improves the likelihood of the participants reaching their retirement objectives

The legal industry is failing to make Employer Sponsors of Retirement Plans accountable for “Heads” because they lack the Subject Matter Expertise to prove that Employer Sponsors of Retirement Plans have been using coins with only “Tails.”

In most cases, Employer Sponsors of Retirement Plans don’t even know that their coins don’t have a “Heads.”

Some judges are trying to tell both that they are flipping the wrong coin.

The Fiduciary Spectator

“Do you find out how the pitcher is throwing by asking the fan in the stands or the batter who was in the batter’s box.”

Attorney Firms continue to be spectators in a sport that requires experience to win. It is clear by the allegations:

“…. accuses them of self-dealing to promote the firm’s mutual fund business and maximize profits at the expense of the plan and its participants.”

“…. accused of forcing its employees into expensive, poorly performing mutual funds….”

“…. caused participants to pay recordkeeping and administrative fees that were multiples of the market rate available for the same services.”

If ERISA of 1974 established standards of conduct and requirement for disclosures why do law firms continue to base their allegations on outcomes instead of breaches of behavior?

Before filing a case where there may be Fiduciary Breaches, Law Firms ought to seek a “batter” who has Subject Matter Expertise in:

. Portfolio/Wealth Management techniques/analytics
. Financial Technology; providing visible evidence of methodology

Breaches in trust are not the same as contractual breaches though the DOL seems to be trying to appease the culture via the BICE.

Until Attorney Firms seek help from those who have the skill sets to uncover the required portfolio and oversight methodologies before the filing, they will continue to be but a spectator in this sport.

Fiduciary Law Is Trust Law


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/).

Fiduciary Culture Shock

Some may argue that The Department Of Labor’s clarification on fiduciary responsibility is complex. It seems that this rationale is focused on the industry’s willingness and ability to adhere to it.

Some may argue that the regulation clarification is not complex at all. ERISA has existed for 42 years and Trust Law for far longer. Perhaps the fiduciary behaviors that are required to fulfill the intricacies of the required duties pose a challenge to the prevailing culture. Did the regulation suddenly become complex after 42 years?

Is the regulation complex or did the regulation expose a generation (or two) who grew complacent in not putting their clients’ interests first?

Fiduciary Focus #2 of 3: Fiduciary Drift: Content

Black’s Law Dictionary defines prudence as the following:
“Carefulness, precaution, attentiveness, and good judgment as applied to action or conduct. That degree of care required by the exigencies or circumstances under which it is to be exercised.”

A Fiduciary will drift in judgement when the focus is returns. Perhaps this occurs due to a lack of understanding in Wealth Management, Financial Planning, and fiduciary cognizance. For someone untrained, returns can be disguised as beta without consideration to volatility.

Investment options should be chosen and be consistent with the stated and visible goals of the plan while increasing the likelihood that the participants achieve their goals. For most asset classes and capitalizations, it becomes difficult to justify the expenses of active investment managers because few consistently outperform passive indexed investments. If active money management is chosen, there has to be a visible methodology that proves why. There have been Class Actions where this has been the basis.

The fundamental duty of the fiduciaries of a Retirement Plan is to adhere to the terms of the plan, to take reasonable care of the assets, and to act in the best interests of the participants. If this sounds vaguely familiar to the Fiduciary Duties of a trustee for a Trust, it should. ERISA modeled it that way. I wonder if the success rates of Class Action Suits and DOL Actions would improve if Employer Sponsored Retirement Plans were defined as trusts in the complaint and then characterizations are made about Fiduciary Duty and breaches.

Fiduciary Ethics: Removing Conflicts of Interest

Removing conflicts of interest is a recognized and necessary ethical behavior. So much so that the U.S. Office of Government Ethics (OGE) is dedicated to overseeing the executive branch’s ethics programs, programs whose primary function is to prevent and resolve conflicts of interest. To give you an idea as to the size and scope of this endeavor, there are approximately 4,500 full-time and part-time ethics officials who work in the executive branch that try to provide employees assistance in identifying and resolving potential conflicts of interest.

The OGE’s mission is to create public confidence in the impartiality of government decision making by improving transparency, increasing accountability, and making sure that senior leaders are making decisions based on the interests of the public rather than their own personal financial interests.

The Department of Labor’s clarification attempts to define and enforce the required ethics that bind human behavior in governance where Fiduciary Duty and Responsibility is mandated. It is no different than the OSE’s mission, 18 U.S.C. § 208, or, ultimately, the Constitution.

Fiduciary Oversight

Establishing a Retirement Plan, in itself, is not a fiduciary action but a business decision. However, by implementing a plan one is acting on behalf of the plan and in these actions one may be a fiduciary. For example, hiring a service provider in and of itself is a fiduciary function.

Acting prudently with regards to oversight is a critical responsibility under ERISA but not engrained in the culture of Employer Sponsored Retirement Plans and the Investment/Brokerage business. The culture has been compensation and product spread driven for decades. In fact, it doesn’t seem as if fiduciaries are aware of others who serve as fiduciaries which can leave them vulnerable to participate in another fiduciary’s breach of responsibility.

Oversight can be demonstrated by following and documenting a formal review process visible through technology. This is what the regulatory authorities are asking for.

Fiduciary Avoidance Through Mixed Messages

The public at large has been inundated with marketing messages that herald individualized advice that is highly personalized and based on the client’s interest. However, when this message is substantiated in a mutual agreement it is completely disclaimed in the form of a footnote so that it doesn’t serve as the primary basis for investment decisions.

Other times advisors clearly receive compensation for recommending specific products though that guidance is considered “general education.” Confused by mixed messages and the regulatory structures that govern retirement assets?

Internal Revenue Code provisions state that any person paid to provide advice on the investment of IRA assets is a Fiduciary. The rulemaking authority is the Department of Labor and the enforcement authority is the IRS.

ERISA pertains to Retirement Plans and states that any person paid
directly or indirectly to provide plan officials or participants with
advice on the investment plan assets is a fiduciary. Both the
rulemaking and enforcement authority is the Department of Labor.

Are these messages mixed?

Retirement Plan Fiduciaries: A Storm On the Horizon

It seems Retirement Plan Sponsors should be taking their Fiduciary Duties more seriously or the legal community will.

The decision, in itself, to select an Investment Advisor, Record-keeper, Administrator, etc. is a fiduciary action. While the Financial Service Industry is focused on fees, commissions, exemptions, and conflicts of interest, the Fiduciary Responsibility of oversight seems to be lost in the equation.

Sometimes, the evidence of history can be seen in our courts. As of now the fear focus seems to be on allegations of excessive fees, commissions, and conflicts of interests. However, Retirement Plan Sponsors should be focusing their concerns on allegations of oversight and/or lack of prudence. Litigation storm clouds are gathering over the documented plan Fiduciaries for not monitoring either the investment options via analytic evidence or for not monitoring the performance of those parties assisting the Fiduciary for monitoring the investment options. If the correct facts and allegations supporting propositions directed at the proper defendent trend, expect a “cloud burst” of legal activity against Retirement Plan Sponsors.

Fiduciary Simplicity

“Under ERISA and the Code, a person is a fiduciary to a plan or IRA to the extent that the person engages in specified plan activities, including rendering ‘‘investment advice for a fee or other compensation, direct or in direct, with respect to any moneys or other property of such plan.”

“In particular, under this standards-based approach, the Adviser and Financial Institution must give prudent advice that is in the customer’s best interest, avoid misleading statements, and receive no more than reasonable compensation.”

Is there any reason why a person seeking retirement guidance, from someone receiving compensation for providing that guidance, should have some other expectation?

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