I'm a Fiduciary, What Are You?

It’s interesting to observe how trends affect one’s life from time to time. Ordinarily when one thinks of trends, they think of it in the context of the social side of life. For example, trends in music, fashion, television, etc. Every now and then trends start to appear in the professional world as well. One emerged trend of the last several years in the 401(k)/Pension business is the trend towards offering fiduciary services. Of course with this comes the inevitable misusage of the term fiduciary and a variety of marketing terms and sales gimmicks intended to take advantage of the trend without actually providing anything in return. Through the course of travel my coworkers and I often get many of the same questions surrounding ‘fiduciary’. Confusion in this area isn’t surprising as there is a lot of market noise, from the marketing terms like Co-Fiduciary or the sales tools like Fiduciary Warrantees to the newest trend, the selling of specific code sections as the different flavors of fiduciary.

We’ve all seen the various new categories of advisor; ERISA §3(38) Investment Manager, Full-Scope §3(21), Limited-Scope §3(21) and so on. On Linked-In there are lively discussions about it, articles are being published on it on Morningstar.com and an unfortunate result is some general confusion from a lot of Advisors of ERISA plans on what all of this is and what they should or should not be calling themselves or doing, not to mention what they’re allowed to do or not allowed to do under their Broker/Dealer contract if they are a registered rep. For that reason, we have created a new piece as an attempt to simplify and consolidate the most recent array of terminology.

Select the following link to view the complete document – Fiduciary…A Different "F" Word.

What Drives ERISA Plan Service Provider Changes Now

The article recently published in PlanSponsor Magazine, entitled, "After the Storm: A year after the market meltdown, a new provider landscape emerges" elaborates on those factors now contributing to plan service provider changes within the ERISA clientbase. Some of the factors are highlighted below:

-“Flight to Quality” -- dependable partner
-Institutional credibility
-Committed to the business and demonstrating organizational strength and stability
-Most employers focusing intensely on their core business = less RFPs
-Fee benchmarking currently motivates many sponsors to begin a review
-Reluctance to jump ship just because of bad investment performance
-Personalize service delivery to participants
-Ease of doing business for sponsors and participants
-Fiduciary support and risk management
-Ensuring adequate investment monitoring

Lifetime Income Disclosure Act, UTC on Track

Recently (specifically, November 2009), the Lifetime Income Disclosure Act was introduced by Senators Jeff Bingaman, Herb Kohl and Johnny Isakson. This bill would require that 401(k) providers inform participants of the monthly income they would expect at retirement. This projection is intended to be modeled after the existing Social Security statements that Americans presently receive annually. The bill is intended to help the average worker to understand their present financial vulnerability. Click here for a copy of the bill.

Obviously, this is a new introduction to the Senate and will be placed on what seems to be a an ever-growing stack of proposed Retirement Plan legislation which may or may not get passed. However, this one is interesting as it supports many notions that we, at Unified Trust, have been talking about for years. Specifically, it mentions that the average American is on path to a substantial shortfall. We usually quote 80% of workers covered do not have adequate retirement savings in today’s dollars. What also is interesting is that this new type of disclosure is aimed at converting consumer (participants) thoughts from the traditional “investment account” approach to a new “benefit account” approach. I.E. Is the 401(k) actually providing me with adequate income replacement?

This is exactly what we are doing with our new service, The unifiedPLAN®. In fact, each participant enrolled in The unifiedPLAN® will be presented with a mathematically sound Success Analysis at the initial enrollment meeting and each quarter thereafter. Click here to view a sample report. This analysis will show them in today’s dollars what their projected surplus or shortfall is and offer suggestions on how to improve the outcome. In addition, based on this projection a custom tailored model portfolio will be established for the participant and adjust automatically as the math changes from quarter to quarter. This established glide path will improve outcomes for virtually all participants.

Benefit Policy Statement - New Value for Advisors

Over the last few years, as more and more professional Retirement Plan Consultants start to manage their practices as ERISA fiduciaries, the documentation process has become very important. Professionally, we have experienced the Investment Policy Statement (IPS) become a document as important to the plan file as the Plan Document, Adoption Agreement and other required documents. Various other policy documents are also normally required, but are often ignored. Some examples are a formal Loan Policy and a formal Funding Policy.

Specifically, cited in ERISA Section 402(b)(1) are requirements to have a written plan document (or documents) with a named fiduciary in charge, with the documents being required to do the following:

(b) Requisite features of plan
Every employee benefit plan shall—
(1) Provide a procedure for establishing and carrying out a funding policy and method consistent with the objectives of the plan and the requirements of this subchapter…

This requirement has been present since the beginning of ERISA, yet most plans simply don’t have one. This is a potential red flag for an auditor and impractical. Unified Trust Company is proud to announce the creation of a new Participant level document that will not only meet this ERISA requirement, but will also create a set of boundaries wherein each individual’s path to successful income replacement at retirement will be mapped out for them formally. This new document is called a Benefit Policy Statement (BPS). To view a sample of the Benefit Policy Statement, click here.

The purpose of this document is to give the participant formal notification of how the trustee intends to drive the process towards secure retirement for the participant. It will provide the Purpose, define the duties and responsibilities of all parties, provide what methods are used to determine Asset-Liability matching and more. Every participant will have their own BPS custom tailored to meet their individual needs. This document will be rolled out in conjunction with Unified Trust’s impending launch of The UnifiedPLAN®, the system of Defined Goal Investing that you’ve been hearing about from us for some time. The UnifiedPLAN® and its use of the BPS are enhancements to Unified Trust’s already successful, Unified Success Pathway™.

The Fraud Conversation

Unfortunately, we all now live in a time when malicious fraudulent acts are a reality in our lives. This comes in many forms, identity theft, credit card fraud and pointedly, investment fraud. We all are affected by the scandals of the day, most recently the Bernie Madoff Ponzi scheme. While we at Unified Trust were not party to this or any other fraud in our 24 year history, we still have to answer the sad question of ‘I never heard of Unified Trust, how do I know you aren’t another Bernie Madoff?’. In conversations with many of our existing Advisor Partners and Advisor prospects, we are told that they are being asked the same type of question. Perhaps, this is the penalty for being independent or for being a boutique service provider or simply a reality of today’s world? In recent days, we’ve taken several steps internally to provide our clients, both Plan Sponsors and Advisors alike, assurances that when money is received by Unified Trust as a service provider that it does reach is intended destination, the Mutual Funds selected by the participants.

As a fiduciary, we advocate clients take measures to protect themselves. At a minimum, clients can do the following:

• Ask to be placed as a third party statement recipient on any accounts where money is held, such as a Mutual Fund Statement.
• Confirm with the service providers that moneys are being held by a separate body or custodian from the entity generating the reporting.
• Ask providers to supply independent source verification of the health of the organization they select. These can be balance sheets, audit records and the like.

Unified Trust has produced a ‘client approved’ article that discusses some of the causes of the Madoff scheme and what clients can do to protect themselves.

Click here to read the article—How UTC Prevents Investment Fraud

Additionally, earlier this year, Unified Trust launched a due diligence website where Plan Sponsors and Advisors can find links to independent sources of information on Unified Trust, Trust Companies and the Trust system. Here you will find:

• Independent Verification of Unified Trust Company’s CEFEX certification for Fiduciary Best Practices
• Department of Labor Oversight
• FDIC Trust Examination Manual
• Unified Trust Company Quarterly Call Reports Federal Financial Institutions Examination Council (“FFIEC”) Central Data Repository
• Fiduciary360 Fiduciary Best Practices Home Page
• U.S. Office of the Controller of Currency (“OCC”) Unified Trust Company Governance
• Most recent SAS 70 Audit Report
• Most recent Unified Financial Services, Inc. Audit Report

To access the due diligence site, please logon to http://www.unifiedtrust.com/advisor and select the Conduct Corporate Due Diligence link under the Account Information link on the left side of the page.

Law Suits - Coming Down Market

We invariably have discussions surrounding Discretionary Trustee Services, Fiduciary Services, Fiduciary Responsibility and Liability that lead to the following inevitable question. What is the real risk of all of this stuff? The question is clearly pointed at challenging whether or not the risks are real risks or simply overzealous rule following. This is especially important as the spate of law suits that are publicized in this area are always with very large plans (Deere, Ford, etc.) and their providers, again mostly very large companies. That contrasts to Unified Trust’s typical market, where we partner with Advisors, which we would define at the Under $100m space. We believe that the risk question misses the point. Liability relief is important and useful to a Plan Sponsor who has concerns in this area, however, the point is that the rules under ERISA are written the way they are because they create a path to follow that mandates ‘Best Practices’. If followed absolutely, they should generally lead plans to be more successful at providing adequate benefits to the participants in a fair way than when they aren’t followed. Obviously, we are a true proponent of ‘best in process, best in outcomes’ based approach to Retirement Plan Management. This applies to both Defined Contribution and Defined Benefit Plans.

That said, it should come as no surprise to anyone reading this that the quantity of law suits in the Retirement Plan industry has increased dramatically since the end of 2007. No one worries when the market is going up if their robust returns are slightly lower due to excessive fees, but in a down market even the slightest hint of excessive fees can bring participants and Plan Sponsor’s blood to boil. We have always stated that it would only be a matter of time before we were hearing about fee-driven law suits in the small plan space and that engaging in ‘Best Practices’ is a good way to avoid risk regardless of market cycles or client size.

In the latest edition of Investment News (July 20, 2009), there is an article that discusses a plan of approximately $2m in assets that is suing its Investment Advisor, Custodian and Recordkeeper. To read the full article, click here.

Interesting to us is that the suit is regarding fee disclosure, revenue sharing and hidden fees. We have written on this subject before in published papers and prior emails. I can forward them to anyone interested. The bottom line is that a fee-based environment (as opposed to commission based) where all fees are known, accounted for and disclosed is the only environment appropriate for Retirement Plan Sponsors. That’s appropriate whether using the Suitability Standard or the Fiduciary Standard.

The following are articles by Unified Trust that discuss fee disclosure, what’s broken and how it works and how it should work.

Ethics of 401(k) Revenue Sharing and Disclosure — Full Article
Revenue Sharing For Qualified Plans — Full Article

Fiduciary Delegation - Myth or Reality?

I get asked about this quite often, so I thought it would be a good topic for discussion here. Specifically, the question that I get asked is whether or not Fiduciary Liability (not responsibility or status) can in fact be transferred from a Plan Sponsor or business owner onto another entity or not. Below, I will try and tackle this question appropriately so that it makes sense for all who may be interested.

The notion that fiduciary responsibility and liability cannot be delegated is explicitly false under law. ERISA itself makes this clear, DOL regulations make it clearer, and case law reinforces it. The most obvious way to delegate is simply to hire someone else to be in charge. For example, when one of our clients prudently hires and monitors Unified Trust as discretionary trustee, the client should be able to effectively delegate much of its fiduciary responsibility with respect to plan assets and the client should not be liable for Unified’s acts and omissions as discretionary trustee. The client simply has a fiduciary responsibility to prudently hire and appoint Unified and to monitor our performance as discretionary trustee.

Another path to delegation is through an ERISA investment manager. ERISA section 3(38) defines an investment manager as any fiduciary (other than a trustee or a named fiduciary):

• who has the power to manage, acquire, or dispose of any asset of a plan;
• is a Registered Investment Advisor (RIA), bank or insurance company;
• has acknowledged in writing that he/she is a fiduciary with respect to the plan.

A named fiduciary can appoint and delegate certain plan functions to an investment manager (pursuant to ERISA section 402(c)(3)) and not be liable for the acts and omissions of the investment manager (pursuant to ERISA section 405(d)(1)). Of course, the one caveat is that the appointment of the investment manager must be prudent and this responsibility lies solely with the appointing fiduciary, typically the Plan Sponsor. Click here to read an article previously published in the Journal of Financial Planning that goes into detail on this very topic and how it can benefit Plan Sponsors.

To Summarize:
Myth – You Can’t delegate fiduciary responsibility

• This is false. Delegation is perfectly legal under ERISA……just rarely done in actual practice.
• Several sections under ERISA specifically outline how delegation would occur. These are sections 402c, 403a, 405(c)(1)/405(c)(2)/405(d)405(c)(1)/405(c)(2)/405(d)(1).
  

402(c) – Formally Divides duties among named fiduciaries
403(a)1 – Formally delegate to a Corporate Trustee
403(a)2 and 402(c)(3) – Formally delegate to an Investment Manager
405(c)(1)/405(c)(2)/405(d)(1) – Formally delegate duties of a named fiduciary to another fiduciary (who is not named) – I.E. Independent Fiduciary
405(d)(1)) – “named fiduciaries are not liable for the acts and omissions of other named fiduciaries” if those fiduciaries have been prudently appointed and retained.

• Based on the above if the plan sponsor delegates the role of trustee to a Corporate (fully discretionary) trustee and does so prudently, that plan sponsor is not responsible for the acts and omissions of that trustee. This includes the delegation of prudently selecting and monitoring investments.
• Bottom-Line – No one can fully remove the Plan Sponsor’s fiduciary role or ALL of its responsibilities, but parts of it can be outsourced to professional fiduciaries including the role of discretionary trustee. The client in this environment transfers liability to this discretionary trustee. This is generally a good thing. The client is still the Plan Sponsor and named administrator and thus is still responsible for settler/ministerial functions as well as prudently hiring and monitoring service providers including the outsourced trustee service.