Business Decisions are not necessarily Fiduciary Decisions
By Neal Shikes
Managing Partner, The Trusted Fiduciary
Neal J. Shikes is Managing Partner of The Trusted Fiduciary and has 30 years of experience in the Financial Services Industry and an expansive network.
The directors of a corporation have a fiduciary duty to their shareholders. Their behaviors must evidence prudence and they cannot profit at the corporation’s expense. With regards to Retirement Plans, Plan Sponsors/Investment Committees must behave in a similar way for the benefit of the plan’s participants. In this capacity, however, business decisions are not necessarily fiduciary decisions.
Employers don’t have to offer retirement plans and the decision to have one is not a fiduciary decision. However, the decisions that one makes to implement and maintain a Retirement Plan are of a fiduciary nature as interdependent methodologies and processes must be executed free of conflicts of interest.
In many cases, administrative and investment costs/expenses reduce the nominal and compounding returns that participants are supposed to receive. This is a common characteristic with “smaller” plans because they do not have the resources to pay for the costs. Larger plans have scale which affords them the opportunity to have lower investment costs and record-keeping charges. When Plan Sponsors/Investment Committees of larger plans do not take advantage of their scale, they become litigation targets because there are indications that they have made business decisions instead of fiduciary decisions. The presence of the following outcomes creates suspicions that the Plan Sponsor/Investment Committee has made business decisions instead of fiduciary decisions:
- investment returns are entwined with record-keeping costs
- indirect compensation to record-keepers and administrators
- revenue sharing
- plan expenses paid per rata instead of per capita
- classes of shares with higher expense ratios while share classes with lower expense ratios were available
- an unsubstantiated amount of active money management as opposed to passive money management
- the presence of variable annuities
- an unsubstantiated amount of proprietary investments
ERISA does not consider any of these outcomes or retirement plan characteristics as breaches. However, when too many of these characteristics are evident, the methodologies that produced them should be questioned. Common to most of the above outcomes, is the creation of a wider spread that pays for something and ultimately reduces the returns that the participants receive.
Since larger Retirement Plans can negotiate investment expenses, costs, and have more options available to them, one would expect these types of outcomes to be minimized. Oddly enough, sometimes Plan Sponsors/Investment Committees try to justify their decisions via product/investment benefits that the participants don’t need.
Did the Plan Sponsor/Investment Committee make decisions that benefit the company more than/at the expense of the participant’s required lifestyle in retirement?
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