Would you intentionally advise clients to build their retirement savings plan on such a flimsy foundation that it could be targeted for a class-action lawsuit?
Of course not.
But unfortunately, there have been hundreds of fiduciary breach lawsuits against plan sponsors over the past 15 years. With more than 200 such filings since January 2020, the evidence is clear that some fiduciaries who manage ERISA 403(b) and 401(k) plans are somehow missing the mark.
There’s also an astonishing disconnect at the participant level. Consider, for instance, that a new U.S. Government Accountability Office analysis suggests that as many as 41% of 401(k) plan participants incorrectly believe that they do not pay any 401(k) fees. Something is clearly wrong.
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Arrogance and abdication of duty are often the culprit. In many cases, executives in the organizations that were sued simply didn’t pay attention until they were taken to court. This is a ridiculous posture. Meanwhile, participants may be paying excessive fees or have too many poorly performing funds in their portfolios with no real oversight.
There are 17.5 million or more lay fiduciaries in the U.S. who have responsibility for the oversight of someone else’s assets under management, according to the Center for Board Certified Fiduciaries (CBCF). Regrettably, the word “fiduciary” has become an overused marketing term for many in the financial-services industry. Some claim their “advisers” are fiduciaries purely because of the way they get paid. But a true fiduciary is a leader who possesses the courage and knowledge to address tough issues and drive better outcomes. A true fiduciary is not defined by a compensation system. For a trained fiduciary, it is a way of life in service of others.
Being a fiduciary has become almost mandatory for investment professionals to grow their business, and in its highest form may be the most powerful partner one can have to oversee an asset pool. In its lowest form, the term fiduciary is defined by “how we get paid, or we don’t take commissions.”
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The implication here is that getting paid by a fee instead of a commission is the ethical, high integrity way to operate. Fiduciaries deserve to be compensated, but the compensation method does not define their integrity or capability. It should be the result of a well-designed support system.
The proliferation of fiduciary experts has not created a wealth of fiduciary excellence. If it had, we would not continue to see what appears to be an ever-increasing volley of fiduciary breach lawsuits. This leads to a conclusion that there remains a dire need for true training in fiduciary responsibility and the need for lay-fiduciaries to outsource their duties to a professional.
According to CBCF CEO Don Trone, research suggests that there are three areas that define fiduciary excellence: purpose, defined by competence, courage, collaboration, character and compassion; passion, defined by individuals who are adaptive, attentive, authentic and accountable; and process, a universal decision-making process through which a fiduciary will engage, explore, envision, execute and examine.
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So, what is the problem here? Many times, issues arise from lack of executive leadership or understanding, or a focus from financial professionals marketing to prospects based on the complex issues associated with the law instead of embracing the way of a true fiduciary.
Rather than focusing on the rules and regulations and building a process to operate at the minimum levels required by those regulations, a fiduciary can operate at a higher level — one of leadership and excellence — by focusing on guiding principles. It is a focus on moral aspiration at a level that far exceeds minimum requirements by instituting best practices, as well as managing processes and addressing issues based on a high level of integrity.
Here are seven key questions an educated fiduciary committee should ask:
- What is our purpose in this fiduciary role?
- Who do we owe our loyalty to?
- Does our process embody today’s best practices?
- Are we appropriately monitoring outcomes?
- Do we have control of the economics of the assets we are overseeing?
- Are there any conflicts of interest?
- Are we making decisions with courage, integrity and commitment to our constituents?
When answered honestly, these lead a fiduciary or fiduciary committee to make better decisions. They expose areas of concern and lead to the remedies that drive improved outcomes.
