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| Fiduciary Focus: The Night of the Living Dead Retirement Plan Participants |
| by
W. Scott Simon
| 05-01-08 |
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ERISA section 404(a)(1)(A) states that "a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan."
The foregoing, one of the most basic fiduciary duties of plan sponsors under ERISA, requires them to identify and understand plan expenses so that they can determine whether they're reasonable. As the U.S. Department of Labor notes, plan sponsors must "ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided." (See "A Look at 401(k) Plan Fees," Aug. 3, 2007.) This duty obviously requires some degree of specificity in matching fees paid to service providers and other expenses of the plan to the products and services they are supposed to pay for. In addition, ERISA section 404(a)(1)(D) requires, as a matter of retirement plan qualification, that a plan be operated in accordance with the terms of its plan documents (but only, of course, to the extent that such terms don't conflict with ERISA). If products and services provided and charged to a plan are not required by the terms of the plan or are otherwise unreasonable in cost, then the plan can be disqualified, resulting in taxation of plan assets.
The Great Disconnect in the ERISA Statutory Scheme
A highly disturbing fact is that many plan sponsors fail to discharge their ERISA section 404(a)(1)(A) duties because they don't know about--much less understand--the total economic impact that the hodgepodge of both "visible" costs (e.g., the annual expense ratio of mutual funds) and "invisible" costs (e.g., the bid-ask spreads of mutual funds) can have on the account balances of the participants in the plans provided to them by the sponsors. This failure is caused by a gaping "disconnect" in the ERISA statutory scheme: non-fiduciary plan providers have no duty to disclose the total economic impact that these costs can have on plan participants to fiduciary plan sponsors who, as noted, have the duty to identify and understand such costs with some specificity.
This great disconnect creates a crazy situation which is akin to allowing plan provider inmates to run the asylum even though plan sponsor wardens clearly have that responsibility--not to mention personal liability for any failures to meet that responsibility. The disconnect of allowing non-fiduciary inmates to control fiduciary wardens creates two immediate problems, both of which could have long-term consequences for American society.
The first problem is that many plan participants (and their beneficiaries) have way too much money needlessly deducted from their retirement plan accounts which, as sure as the morning follows the evening, will net them far less money for retirement. The end result of that could well be millions of retired participants with plan balances in the five figures and decades of life expectancy ahead of them wandering America like the zombies in "The Night of the Living Dead." Do we, as a nation, really want to keep allowing the kind of public policy that could lead to such a spectacle?
The second problem is that many plan sponsors are placed in needless legal jeopardy because they cannot carry out one of their basic ERISA fiduciaries, which is to conduct a meaningful analysis of the total economic impact that visible and invisible costs have on the account balances of the participants in the plans they sponsor. This impact is often unnecessarily far too great in cases where plan providers present plan sponsors with plans riddled with high and hidden costs. Under the current system, many plan sponsors are, in effect, unwittingly held hostage by, and are therefore at the mercy of, those that provide products and services to the plans they sponsor. Some of these providers, primarily insurance companies and mutual fund companies, show up over and over alongside plan sponsors as codefendants in lawsuits involving accusations of retirement plans associated with high and hidden costs. That fact surely isn't going to change in the foreseeable future.
Current Attempts to Bridge the Disconnect
H.R. 3185, now winding its way through the House of Representatives, is a legislative attempt to correct the great disconnect in the ERISA statutory scheme that I have described. The Department of Labor, in its regulatory attempt to bridge this disconnect, held a "Hearing on Reasonable Contracts or Arrangements Under Section 408(b)(2) - Fee Disclosure" on March 31 and April 1.
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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