 |
| > Investing > Fiduciary Focus |
 |
| Fiduciary Focus: Non-Fiduciary Investment Consultants (Part 2) |
| by
W. Scott Simon
| 06-01-06 |
|
|
My article last month focused on a broker-dealer investment consultant to a 401(k) plan. In the consultant-drafted contract governing the plan fiduciaries and consultant, I detailed how that contract named the consultant as an ERISA section 3(21) fiduciary but then excised all language from the contract that would actually make the consultant responsible (and, therefore, liable) for any duties required of an ERISA section 3(21) fiduciary.
I also pointed out that ERISA-defined "investment advice" pertains only to investments and not managers--which is precisely why the language in the consultant-drafted contract (1) mentions only managers and not investments and (2) places the entire onus on the plan fiduciaries (not the investment consultants) for selecting and monitoring plan managers, not plan investments.
In addition, I noted that fiduciaries of 401(k) plans can derive real value in having an ERISA section 3(38) fiduciary, less value in having an ERISA section 3(21) fiduciary that actually assumes the duties of such a fiduciary, and no value (indeed, great harm) in having a "phantom" 3(21) fiduciary that supplies plan fiduciaries with deceptive contracts that are legally toothless against the consultant.
A number of you e-mailed me in response to the article and posed a very simple question: Don't actions determine who a fiduciary is rather than what a contract says? The follow-up example you provided was something like: In cases where a consultant picks (or even merely recommends) and monitors specific investment options for a 401(k) plan wouldn't the consultant's actions be enough to assign it fiduciary responsibility regardless of what its contract says since ERISA considers anybody that has influence over plan fiduciaries to have discretionary authority?
While the general question is perceptive, the example posed doesn't comport with the terms of the contract I described in the article. In that contract (representative of many others, sad to say), the consultant has no responsibility at all to pick (or even merely recommend) and monitor specific investment options. That responsibility remains solely on the shoulders of the plan fiduciaries. All the consultant had to do under the contract was pick managers for (and remove them from) its recommended list. The consultant had no duty whatsoever to say whether or not a particular manager (or managers) was "prudent" under an ERISA or SEC standard (or, my gosh, even "suitable" under the broker-dealer standard) for the particular plan in question.
I will run the risk of repeating myself since it's vitally important to understand precisely how those that supply such contracts to plan fiduciaries can get away with so much. As I put it in my article: "It's no accident under the terms of this contract that the investment consultant promises to provide due diligence and monitoring services only as to Managers, not investments offered in the 401(k) plan (and only for the purpose of determining whether the Managers should stay on the Recommended List, not whether the Managers are prudent (or even suitable) for the Client)." In this case (as well as many others), the consultant does not provide specific investment advice to the plan; the advice is simply generic.
The investment consultants employed at large broker-dealers are particularly notorious for supplying plan fiduciaries with contracts that eviscerate any real fiduciary responsibility under ERISA section 3(21), like the contract I examined in last month's article. This has to do with the simple fact that brokerage firms just don't want to be fiduciaries. They have assured that outcome via the government through such things as the SEC's adoption of the "Merrill Lynch rule" and via the private contracts they sign with their registered representatives where the only fiduciary duties in sight are those owed to the brokerage firms themselves (while clients are owed duties based on a mere "suitability" standard).
The problem with this situation is that ERISA section 3(21) requires that only a "plan fiduciary" (defined as a (a) bank or savings and loan association, (b) insurance company or (c) registered investment adviser) can invest and manage ERISA assets. Not to worry: Broker-dealers can get their hands on such assets since every one of them is dually registered as a registered investment adviser. Broker-dealer investment consultants can corral those ERISA assets by supplying plan fiduciaries with contracts that gut--as explained in last month's article--any real fiduciary responsibility (and corresponding liability) the consultants would otherwise have under ERISA section 3(21). (The mind that thought up this racket could surely solve Social Security's mess--and maybe even Medicare's.) Hey, I told you that brokerage firms just don't want to be fiduciaries.
|
|
1
|
2
 |
|
|
|
| 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. |
|
|
|
|
|
 |
|
Manager's View Participants
|
|
|
|
|
|
|
Follow us on Twitter
