Ostrich Fiduciaries-Can We Get Their Heads Out of the Sand?

                                                                                              By Carol Buckmann                                                                                                  

Ostriches are notorious for their amusing habit of thinking we can’t see them if they poke their heads into the sand.  But, of course, while this habit may make them less anxious, it doesn’t change the reality that they are visible.  It seems that a similar practice has been followed by plan sponsor fiduciaries, many of whom deny that they have fiduciary responsibilities. In fact, on that front, we seem to be sliding downhill.  I write periodically about surveys that show that many plan sponsors are clueless about their fiduciary status, but the results of the latest Alliance Bernstein report are something of a shocker.  49% of plan sponsors surveyed, 39% of investment committee members and 22% of administrative committee members didn’t understand that they are fiduciaries. In past surveys, 39% and 30% of plan sponsors were unaware of their fiduciary status, so there has actually been a marked decline in fiduciary awareness. How do we account for this? It may be that all of the discussion of the Fiduciary Rule and whether brokers are fiduciaries has given some people the impression that a fiduciary is some third party you hire. But that is just speculation. It may also be that it is just impossible to reach some of these people in the current environment where many plans outsource their plan operations to the Fidelitys and Vanguards and vendors aren’t required to clearly inform adopting employers of the responsibilities employers take on under the agreements that they sign.  Whatever the reason, this cluelessness has significant repercussions for plan participants.  A clueless fiduciary may be: •    Failing to monitor high plan fees, which cut into account growth in 401k plans •    Putting plan investments in a “set it and forget it” category, and failing to replace underperforming funds or provide good current investment choices •    Not checking what the vendors are doing, so that mistakes go uncorrected •    Not picking the best outside advisers or, worse still, laboring under the impression that they don’t need outside advisers •    Failing to understand that the plan can’t be operated like their business-plans must be run solely in the interest of participants and beneficiaries •    Missing reporting deadlines or unaware that forms must be filed.  •    Engaging in prohibited transactions Is there a solution? Obviously there isn’t an easy one, and the fiduciary education programs we have either aren’t as effective as they should be or made readily available to the people who most need them.  Here are a few suggestions: •    Vendors should ask: Who will be the fiduciary or fiduciaries at your company who will take on the company’s responsibilities under this agreement? They should also provide a list of those responsibilities to adopting employers. •    Advisers and attorneys should strengthen their fiduciary training programs and encourage at least one person from each plan sponsor to attend regular training sessions. •    Require that the names or positions of company fiduciaries be reported as part of Form 5500 or in summary plan descriptions, with a note that at least one name MUST be identified for each single employer plan. •    Beef up the employer education sessions provided by the Department of Labor and publicize them more. These would be a start, but there isn’t any magic solution here.  The plan sponsors who need enlightening the most are probably the ones who don’t hire outside advisers in a misguided attempt to save money. This group may not learn until they are audited, have to settle a compliance action, or lose a lawsuit that they don’t need to understand that they are fiduciaries in order to have fiduciary liability.  Maybe the best push towards fiduciary awareness would be to better publicize what happens to clueless fiduciaries who get caught. ·       

Ostriches are notorious for their amusing habit of thinking we can’t see them if they poke their heads into the sand.  But, of course, while this habit may make them less anxious, it doesn’t change the reality that they are visible.  It seems that a similar practice has been followed by plan sponsor fiduciaries, many of whom deny that they have fiduciary responsibilities. In fact, on that front, we seem to be sliding downhill. 
I write periodically about surveys that show that many plan sponsors are clueless about their fiduciary status, but the results of the latest Alliance Bernstein report are something of a shocker.  49% of plan sponsors surveyed, 39% of investment committee members and 22% of administrative committee members didn’t understand that they are fiduciaries. In past surveys, 39% and 30% of plan sponsors were unaware of their fiduciary status, so there has actually been a marked decline in fiduciary awareness.
How do we account for this? It may be that all of the discussion of the Fiduciary Rule and whether brokers are fiduciaries has given some people the impression that a fiduciary is some third party you hire. But that is just speculation. It may also be that it is just impossible to reach some of these people in the current environment where many plans outsource their plan operations to the Fidelitys and Vanguards and vendors aren’t required to clearly inform adopting employers of the responsibilities employers take on under the agreements that they sign.  Whatever the reason, this cluelessness has significant repercussions for plan participants.  A clueless fiduciary may be:
•    Failing to monitor high plan fees, which cut into account growth in 401k plans
•    Putting plan investments in a “set it and forget it” category, and failing to replace underperforming funds or provide good current investment choices
•    Not checking what the vendors are doing, so that mistakes go uncorrected
•    Not picking the best outside advisers or, worse still, laboring under the impression that they don’t need outside advisers
•    Failing to understand that the plan can’t be operated like their business-plans must be run solely in the interest of participants and beneficiaries
•    Missing reporting deadlines or unaware that forms must be filed. 
•    Engaging in prohibited transactions
Is there a solution? Obviously there isn’t an easy one, and the fiduciary education programs we have either aren’t as effective as they should be or made readily available to the people who most need them.  Here are a few suggestions:
•    Vendors should ask: Who will be the fiduciary or fiduciaries at your company who will take on the company’s responsibilities under this agreement? They should also provide a list of those responsibilities to adopting employers.
•    Advisers and attorneys should strengthen their fiduciary training programs and encourage at least one person from each plan sponsor to attend regular training sessions.
•    Require that the names or positions of company fiduciaries be reported as part of Form 5500 or in summary plan descriptions, with a note that at least one name MUST be identified for each single employer plan.
•    Beef up the employer education sessions provided by the Department of Labor and publicize them more.
These would be a start, but there isn’t any magic solution here.  The plan sponsors who need enlightening the most are probably the ones who don’t hire outside advisers in a misguided attempt to save money. This group may not learn until they are audited, have to settle a compliance action, or lose a lawsuit that they don’t need to understand that they are fiduciaries in order to have fiduciary liability.  Maybe the best push towards fiduciary awareness would be to better publicize what happens to clueless fiduciaries who get caught.

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