“Whoever is careless with the truth in small matters cannot be trusted with important matters.”
—Albert Einstein
The Town of Fairfield, CT pension fund having $42 million was wiped clean in a Ponzi scam. So much for trust.
Many companies are putting hundreds of thousands or maybe even millions of dollars, into their company retirement plans on behalf of their employees, which is why they need to trust a fiduciary to handle your 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 advisor 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 non-fiduciary advisors.
If your goal is to minimize your fiduciary liability to the fullest extent, you should consider hiring an ERISA 3(38) fiduciary that has full authority to make decisions about the investment lineup, including controlling the fund lineup. By doing so your liability is limited to prudently selecting and monitoring the 3(38) Investment Manager and benchmarking their fees.
But choosing a fiduciary is not a “one-size-fits-all” situation. Many Retirement Plan Advisors are not true fiduciaries and try to puff up their stature by claiming they are an ERISA 3(21) fiduciary. A 3(21) Investment Advisor works with you to recommend the investment lineup for your plan but does not have discretion over plan investments. If you prefer to maintain discretion and control of your plan’s investments, then hire a 3(21) Investment Advisor to select investment funds to make available to your employees. It’s up to you to approve the fund lineup as well as any recommended changes over time. Under this arrangement, the 3(21) Investment Advisor delivers value but is limited to making recommendations. You would continue to have the liability for the selection, monitoring, and updating of the plan’s investments.
There are explicit costs to handle the administration and recordkeeping functions of the plan, as well as explicitly stated investment expenses. You are required as a plan sponsor to know all of these explicit costs. There are also implicit expenses associated with your plan. These costs can hurt the overall investment return for your 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 your plan. Second are the implicit investment expenses, which can be the most detrimental to your plan.
Having the right fiduciary at the helm is very important. You may have employees complain of poor investment performance, confusion due to too many fund choices, administration problems; and so on. In many cases, poor investment performance can result in employees complaining to HR 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” put out by Mark Matson, of “Matson Money,” an Investment Advisory Firm with $9 billion in assets under management, there are seven reasons everything can go wrong when small 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 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 they acted irresponsibly in its company retirement plans and pensions. Just ask the Town of Fairfield, Connecticut if doing more homework when it came to entrusting their funds to the right person could have saved the day.
Robert Stabile owns Higbie Advisory, LLC a Registered Investment Advisor located in Melville, Long Island. Higbie Advisory is partnered with Maston Money, an ERISA 3(38) fiduciary. Robert can be reached at rstabile@higbieadvisory.com and 631-878-6195. HigbieAdvisory.com.
