Thursday, February 28, 2013

Bernie, Bernie, Bernie

There was a point in time, not too long ago, that at virtually every meeting I was having, I had to "prove" that my firm wasn't Bernie Madoff.  It was interesting, because the only thing we had in common with Bernie was that we weren't a household name.  In virtually every other way we were exactly the opposite. 

National Trust Companies, unlike Hedge Funds (at the time) have the highest amount of scrutiny of any type of financial institution.  We have up to five separate audits per year including a 6 week long audit by the Office of the Comptroller of Currency (OCC).  Our firm spends approximately 50% of our pre-tax profit on audit alone.......I'll let that one sink in for a moment.

Also, unlike Bernie, as a Discretionary Corporate Trustee overseeing predominantly ERISA plans (and the like), we are held to the highest fiduciary standard, the ERISA fiduciary standard which obligates us to act in the best interest of the participants, act prudently at all times, be fully disclosed, act without conflicts of interest, and engage in best practices (like separation of duties between custody and reporting). 

In fact, arguably, Discretionary Corporate Trustees, via a National Trust Charter would be the SAFEST place where a Plan Sponsor could place their plan assets. 

As a corollary to the above, when we discuss risk mitigation, relief from fiduciary liability exposure (as we've discussed many times on this blog), one of the arguments back we get is that fiduciary liability is a myth, that lawsuits don't happen down market, that all this "fiduciary stuff" is just fear selling.  Some of that is true.  There are certainly more visible lawsuits up-market than down-market and the marketplace does have a lot of "fear sellers" in it, but to say that fiduciary risk is non-existent would be unfair. 

Case in point: According to this press release, the DOL recovered $43m for employer benefit plans that were victimized by the Bernie Madoff ponzi scheme.  In this particular instance, the funds were recovered by the Investment Manager, Austin Capital Management who was acting as a fiduciary over a variety of plans benefiting many employers (big and small) and participants.  Press release below:

So, when a service provider, like a Discretionary Corporate Trustee, says that one of the benefits of hiring them is to offload some fiduciary risk, bear in mind that they are taking on real, tangible risk on behalf of the client.

Friday, February 15, 2013

Employer Investment Decisions: Any Affect on Performance?

In a recent article from the Center for Retirement Research at Boston College, the authors further validated what is commonly accepted as fact in the 401(k) industry: participants routinely chase performance and subsequently underperform most basic investment strategies (buy and hold and 1/N rule, for example).  Nothing really new here, but good to know that prevailing thought is once again substantiated.   

More importantly, the article explored investment decisions made at the plan level, seemingly by the Plan Administrator, which offered a different perspective on the “investment decisions” debate.  In their research on plan level investment decisions, the authors focused on plan fund performance versus comparable indexes/randomly selected funds (in the same asset class), as well as whether or not fund additions and replacements added value.  The results mirror the same outcome we typically observe at the participant level: like their employees, employers do not improve investment performance through their fund selection and retention decisions.  For specific details of the study’s results, see the entire article here: How Do Employers' 401(k) Mutual Fund Selections Affect Performance?                 

It’s fair to say that when monitoring potential investments, fiduciaries are confronted with an overwhelming amount of information and are often faced with the burden of interpreting conflicting statistics.  One idea that has been gaining traction for employers is to outsource (i.e., allocate) specific duties to others such as a discretionary investment manager or a discretionary corporate trustee.  Discretionary corporate trustees, as independent fiduciaries, relieve the employer of making investment decisions.  Further, they provide their clients with a systematic method for selecting, monitoring and replacing plan investments if needed.