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| > Investing > Fiduciary Focus |
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| Fiduciary Focus: Non-Fiduciary Investment Consultants |
| by
W. Scott Simon
| 05-04-06 |
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Most fiduciaries of 401(k) plans have a service provider that in some way gives assistance to them concerning plan investment options. Such providers include brokerage firms, insurance companies, banks, trust companies, mutual fund families, financial planning firms, and other entities offering their investment services. The people who represent these service providers bear such varied titles as "advisor," "consultant," "financial consultant," "stockbroker," "insurance agent," "financial planner," "registered representative," "vice president," as well as others. (I'll lump together service providers and the persons representing them into the term "investment consultant" for purposes of this article.)
Investment consultants come in three basic varieties when it comes to acknowledging their fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA): (1) those that don't acknowledge any fiduciary responsibility at all, (2) those that acknowledge fiduciary responsibility under ERISA section 3(21)(A), and (3) those that acknowledge fiduciary responsibility under ERISA sections 3(38) and 405(d)(1). There are significant differences among such non-fiduciaries and fiduciaries, and those differences can have a direct bearing on the retirement lifestyles of participants in 401(k) plans. Plan fiduciaries must have a good understanding of such differences so that they can protect plan participants and their beneficiaries from the worst of the investment consultants and help them benefit from the services of the best consultants.
Non-Fiduciary Investment Consultants
Some investment consultants refuse outright in the contracts they sign with fiduciaries of 401(k) plans to acknowledge any fiduciary responsibility to such fiduciaries. (Actually, the legal entity that enters into a contract with an investment consultant is the 401(k) plan itself, but plan fiduciaries that have the legal authority to act on behalf of the plan sign the contract. It is ultimately plan participants, and their beneficiaries, of course, upon whose behalf the plan fiduciaries must act prudently.) Since these consultants are not fiduciaries, they have no duty other than a moral one to put the interests of plan participants and their beneficiaries first.
Even with the best of intentions, non-fiduciary investment consultants simply pursue their own financial self-interests with no legal obligation to plan participants to ensure that they get the very best investment products at the very best price. For example, industry practices allow non-fiduciary consultants to collect "revenue sharing" payments. These payments pass--usually in the deep, dark, dead of night--from mutual fund companies and brokerage firms to investment consultants in exchange for having the consultants make available the companies' and firms' mutual funds for selection as 401(k) plan investment options. It's not illegal, of course, for non-fiduciary investment consultants to engage in such "pay to play" schemes.
The Beautiful World That Many Investment Consultants Create for Their Own Benefit
Other investment consultants will acknowledge ERISA section 3(21)(A) fiduciary responsibility in their contracts with plan fiduciaries. The problem is that the pre-drafted, off-the-shelf contracts that many such consultants present to plan fiduciaries (often at the last minute just before signatures are affixed with no time to negotiate terms) include language that virtually "guts"--with exquisite legal skill and precision--from a fiduciary-consultant contract significant ERISA section 3(21)(A) fiduciary duties that investment consultants would otherwise owe to plan participants (and their beneficiaries). Before examining how a real-life contract carries out this kind of gutting, let's review the relevant text of ERISA section 3(21)(A).
ERISA section 3(21)(A) provides that a person is a fiduciary with respect to a plan to the extent (i) it exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) it renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) it has any discretionary authority or discretionary responsibility in the administration of such plan.
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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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