Wednesday, August 19, 2015

The Directed Trustee Loophole

“On the one hand, fund companies are hired by plan sponsors – and required by law – to create menus that serve the interests of plan participants. On the other hand, they also have an incentive to include their own proprietary funds on the menu, even when more suit­able options are available from other fund families.”     From Are 401(k) Investment Menus Set Solely for Plan Participants, by Poole, Sialm, and Stefanescu, Center for Retirement Research at Boston College

The following is a link to the above cited brief that is based on a forthcoming study in the Journal of Finance:   The brief highlights something that I think we have all understood to be true (?) but is either overlooked or has just been accepted.  

The study shows mutual fund companies – and I would also argue insurance companies - have an undue influence on the use of their proprietary funds.

“Where mutual fund companies serve as plan trustees – indicating their involvement in the management of the plan – additions and deletions from the menu of investment options often favor the company’s family of funds. More significantly, this bias is especially pronounced in favor of affiliated funds that delivered sub-par returns over the preceding three years.”

Interestingly all of the mutual fund companies would be serving as a directed trustee and would claim (particularly in court) to have no fiduciary responsibility - that the plan sponsor is “making all decisions.”

So how is a Directed Trustee, as a limited purpose fiduciary with a duty of loyalty to the participant and their beneficiaries, allowed to unduly influence investment selection in a way that would put their interests ahead of the participant? Tough question, but I’ll give it a shot.  “Conflicted” is in the eyes of the beholder.  In other words, a directed trustee has free reign, for the most part, to be compensated via revenue sharing payments (ABN AMRO Letter) and/or offer proprietary funds in the investment menu because (although a fiduciary) the directed trustee has no discretion over plan assets.  Thus, the argument is made that, while there may very well be a conflict of interest, it wasn’t the directed trustee’s decision to select XYZ investment manager, it was the plan sponsor’s— therefore, no conflict with ERISA fiduciary standards on the part of the directed trustee.  The following language from the DOL Advisory Opinion 97-15a [Frost Model] spells it out:

“…it is generally the view of the Department that if a trustee acts pursuant to a direction (i.e. is directed) in accordance with section 403(a)(1) or 404(c) of ERISA and does not exercise any authority or control (i.e. discretion) to cause a plan to invest in a mutual fund, the mere receipt by the trustee of a fee or other compensation from the mutual fund in connection with such investment would not in and of itself violate section 406(b)(3).  Note: Emphasis added along with parenthesis

Unified Trust is a Discretionary Plan Trustee – not a Directed Trustee.  Under 403(a), the discretionary plan trustee “shall have exclusive authority and discretion to manage and control the assets of the plan “with a duty of loyalty” and no conflicts of interest.  Subsequent language allows an “escape clause” for the trustee. This language says that to the extent the trustee is directed by the plan sponsor or other named fiduciary they are not responsible for the management of plan assets. This is where the term “directed trustee” comes from. This loophole has been widely used by most vendors giving the appearance of a loyal fiduciary with no conflicts.

If a plan sponsor was truly aware of the difference, which do you think they would choose?
-    A Discretionary Plan Trustee who has a duty of loyalty and no conflicts of interests…like Unified Trust?  


-      A limited purpose Directed Trustee?

Wednesday, August 5, 2015

What's a Plan to Do?

“Some sponsors are just starting to think about outcomes, since in the past they thought they needed a retirement plan because that’s part of what it takes to attract employees.  But they had never thought about, ‘Is the plan supposed to do something? And if it is supposed to do something, what is it supposed to do,” said Dr. Gregory Kasten founder and CEO of Unified Trust.

Dr. Kasten was among a few select experts in the field interviewed for the article Retirement Ready-or Not, recently published by  The article stressed the critical role an advisor plays in helping plan sponsors answer the question, ‘what is a retirement plan supposed to do”? While that question seems simplistic in nature, surprisingly very few sponsors ever think about the true purpose or goal of their retirement plan as it relates to their employees success. Many in the industry measure success in terms of tracking participation and deferral rates, monitoring investment performance, and benchmarking fees all of which are important, but none of which independently provide a complete guide as to whether or not participants are succeeding. At Unified Trust, we believe that success is an employee being able to adequately replace their paycheck when they retire.

We also believe that success doesn’t happen by chance. That’s why Unified Trust developed the ‘benefit policy statement’ which is considered a sister document to the ‘investment policy statement.’  “If you want to manage outcomes, you are going to have to measure outcomes – and go a step further and define the outcomes you want,” said Kasten.

In these times of fee compression where it’s ever so critical to show added value, by helping a plan sponsor deliver improved outcomes for their participants, advisors can differentiate themselves in the marketplace.  As we move into the future, how successful—or unsuccessful— a retirement plan is in delivering retirement security may become a factor in determining whether or not a plan sponsor and other plan fiduciaries are meeting their fiduciary responsibilities.  Having a plan that doesn’t measure up to changing industry standards could leave the fiduciaries open to potential litigation.


- Jason