“Whoever is careless with the truth in small matters cannot be trusted with important matters.” – Albert Einstein
Ten years ago, the pension fund for the town of Fairfield, Conn., lost $42 million in a Ponzi scam. So much for trust.
Many companies are putting hundreds of thousands of dollars, maybe even millions, into their company retirement plans on behalf of their employees, which is why they need to trust a fiduciary to handle the funds.
A fiduciary is a person that has the power and responsibility of acting for another in situations requiring total trust, good faith and honesty. You give that fiduciary discretionary authority over your assets. A fiduciary financial adviser can buy and sell securities in your account on your behalf without needing your express consent before each trade. Because fiduciaries have this discretionary authority, they’re held to a higher standard than nonfiduciary advisers.
Many retirement plan advisers are not true fiduciaries and are limited to making recommendations. You would continue to have the liability for selection, monitoring and updating of the plan’s investments.
If a company’s goal is to minimize its fiduciary liability to the fullest extent, it should consider hiring an Employee Retirement Income Security Act 3(38) fiduciary who has full authority to make decisions about the investment lineup, including controlling the fund lineup. By doing so, the company’s liability is limited to prudently selecting and monitoring the 3(38) investment manager and benchmarking the fees.
There are explicit costs to handle the administration and recordkeeping functions of the plan, as well as explicitly stated investment expenses. The business owner is required as a plan sponsor to know all of these explicit costs. There are also implicit expenses associated with the plan. These costs can hurt the overall investment return for the participants because many of these expenses are not easily detected and often come out of the investment returns.
The implicit costs are two-fold. First, just like the explicit costs, there are implicit costs associated with the administration and recordkeeping aspect of the plan. Second, there are implicit investment expenses, which can be the most detrimental to the company’s plan.
Having the right fiduciary at the helm is very important for a business owner. Employees might complain of poor investment performance; they might be confused because of too many fund choices; there could be administration problems. In many cases, poor investment performance can result in employees complaining to human resources or upper management. Suddenly, what was supposed to be an employee benefit ends up becoming a frustration to both the business owner and the participants.
According to the “Fiduciary Awareness Guide” by Mark Matson, there are seven reasons everything can go wrong when business owners don’t have the correct fiduciary in place:
- Not knowing that a business owner is a fiduciary.
- Relying on a broker for investment advice.
- Not knowing your responsibilities as a plan sponsor.
- Using active management.
- Relying on ERISA Section 404(c) for reduced liability.
- Not understanding the costs, commissions and fees in the plan
- Not having an investment policy statement.
No company wants to be highlighted negatively because it acted irresponsibly with its company retirement plans and pensions. Just ask the town of Fairfield, Conn., if doing more homework when it came to entrusting funds to the right person could have saved the day.
Robert Stabile owns Higbie Advisory LLC, a registered investment advisory in Melville, N.Y. He can be reached at rstabile@higbieadvisory.com.
