The Fiduciary Liability of the Imprudent Fiduciary

Many fiduciaries think more like a participant than one concerned with managing the fiduciary liability of their plan. I once talked to a plan fiduciary and found that they had money in two previous 401(k) plans. I was puzzled as to why that was the case. It came up in a conversation where they were discussing the fact that they were now divorced and had not change their beneficiary designation on one of those previous accounts.

Fiduciary as participant

You might think that a fiduciary would first look out for their own interest, especially when they were a participant in a plan. A fiduciary should actually know more than the typical participant regarding investments and the rules that govern 401(k) plans. The fiduciary role comes with the potential for personal financial loss. Why would this fiduciary simplify their life and roll their previous 401(k)’s into their current plan? This would allow them to avoid the problem when beneficiary designations don’t match your current situation. Moreover, they have the ability to affect the plan menu and make sure that the fees debited from their account are fair and reasonable.

Fiduciary liability as investment fiduciary

A responsible plan fiduciary has access to more information about their plan than the typical participant. If you’re working with a retirement consultant that is an investment fiduciary, that person should be providing you with reports such as this. Based on this knowledge the aforementioned fiduciary could compare results to their other 401(k) plans. (This free look works for IRAs too). Why wouldn’t a fiduciary make their existing plan the best choice, aided with this outside information?

I have a few clients that work for companies with tens of million dollar 401(k)/ERISA 403(B) plans. I tell them that if they held the same investment in their plan that is currently held in their IRA, they would get better investment results because of lower fees. That is the power of fees and working with an investment advisor representative that is bound to keep their client’s interests first. That does assume that their plan is leveraging their bulk purchasing power to qualify for the lowest fee available. As a fiduciary you should understand that all things being equal, lowering fees may help drive investment performance.

Discerning fiduciary liability

In conversations with many fiduciaries I have discovered that many simply go along with the existing 401(k) program. Sometimes that program knowingly or accidentally has self-dealing, a fiduciary liability under the Employee Retirement Income Security Act. Self-dealing occurs when someone at the firm is getting special treatment or some client billing in exchange for being the broker on the 401(k) plan. “Bill or Jane has done well by me or the partners so I’m sure that we are in good hands” has become the chant of some investment committees. Some fiduciaries feel that working with deep pocketed firms as either their record keeper or broker that they are in a “safe position.” Many investors felt that with Lehman Brothers, Bear Stearns and Merrill Lynch before the Great Recession hit. Bernie Madoff was once highly regarded and managed assets for the New York Mets and Steven Spielberg.

With this kind of backdrop some fiduciaries have just not developed a discerning eye or take the time to read the Department of Labor’s publication “Meeting Your Fiduciary Responsibilities”. It gives a cursory review of the responsibilities and fiduciary liability an ERISA plan fiduciary such as a 401k or ERISA 403(b).

Are you one of the many time crunched fiduciaries struggling to bridge the gap between their short-term career and long term retirement interests? Do you need a personal retirement risk review and a plan risk review? If you are part of an investment committee you owe it to yourself to understand your individual risk exposure. In addition to education, you may want liability insurance. While you may not want to rock the boat, if there is a Department of Labor audit emergency you will have a personal risk control plan.