Evaluating Retirement Plan Advisors:
An Exclusive Article For The Profit Sharing/401(k) Council - Printed with the permission of CFDD
by Phillip G. Chiricotti, President Center for Due Diligence
© Copyright 2010, Center For Due Diligence All rights reserved.
NOTE: Gary Sutherland, CEO of NAPLIA has consulted extensively with the CFDD on various aspects of the EAE Program
The retirement plans market and the financial services industry have matured. Consistent with a maturing market, both are subject to increased liability, litigation, higher standards, extreme disclosure, regulatory overreach, fee pressure and intense competition.
Given that few retirement plan sponsors are in the investment or retirement plans business, sponsors who manage their plans without the services of an independent expert shoulder a heavy burden and increased fiduciary liability.
The economic contraction, reduction in corporate staff, increased liability and decline in sponsor satisfaction has made the role of an "expert" advisor even more important. Not surprisingly, sponsors have been adding advisors to their plans for years.
Less than 20% of all plans are currently sold and serviced on a direct basis. Small plans make up the majority of all plans and 80% of those plans with an advisor are serviced by generalists who lack detailed knowledge of employer-sponsored retirement plans. While small plan business is often channeled to existing relationships, generalists are not in a position to add value. Fiduciary relationships are under intense scrutiny and it should be noted that generalists may increase the sponsor’s liability.
As sponsors become more aware of their vulnerability, the majority of generalists will be replaced in the years ahead. ERISA’s standard of care is exceptionally high and all fiduciary decisions have consequences. Sponsors who can’t prove the prudence of their decisions through a documented process, including those made with the best intentions, are now clearly in the plaintiffs’ crosshairs.
Sponsors have become increasingly knowledgeable about retirement plans, but many are not fully cognizant of their retirement plan duties and personal liability under ERISA. Although the law requires fiduciaries to implement a prudent process for evaluating, hiring and monitoring advisors, the duties are rarely prioritized or documented.
Evaluating retirement plan advisors is a specialty area and while expert retirement plan advisors are a positive catalyst for change, most sponsors lack the background to ask the right questions, interpret the answers and make informed decisions.
______________________________
NO FORMAL PROCESS FOR EVALUATING ADVISORS
Enormous attention has been focused on the importance of goals, expectations and on the hiring of investment managers, but little attention has been devoted to the evaluation and monitoring of retirement plan advisors, i.e., pension consultants. Advisors are the gatekeepers to trillions of dollars of retirement plan assets and the security of millions of plan participants, but there is no formal process, law or rules for evaluating them.
Given the maturity of the industry, a formal process for identifying the advisor’s role, including applicable standards of care, fiduciary distinction, insurance coverage, bonding, compensation methodology, disclosure, conflict safeguards, commission recapture and specific responsibility is long overdue.
Retirement plan advisors provide a wide variety of services, including investment policy statements, money manager reviews, investment monitoring & reporting, program searches and much more. While plan sponsors can’t eliminate their fiduciary responsibility, liability may be limited through the use of 404(c), QDIA safe harbors and by the appointment of expert retirement plan advisors.
______________________________
FIDUCIARY ROLES & INSURANCE
Like most small plan sponsors, many advisors are unaware of their fiduciary responsibilities under ERISA while others ignore them. The majority of advisors are also unwilling or unable to acknowledge their ERISA fiduciary status.
Some advisors will acknowledge their fiduciary status on a functional basis, but will not put it in writing. The industry has often used the "Fiduciary" term for marketing and while a limited number of advisors will acknowledge fiduciary status in writing, their advisory contracts may be structured to limit liability.
Contrastingly, a select group of true retirement plan experts will acknowledge their ERISA fiduciary role and responsibilities in writing via an appropriate contract. A sub-set group will accept additional liability for discretionary investment control and others may be willing to accept an even broader fiduciary role.
While the fiduciary status of advisors remains unsettled, it has a significant impact on retirement plans, sponsor liability, claims, conflicts and prohibited transactions, including self-dealing. The advisor is rarely a "named fiduciary" in the plan document and regardless of their fiduciary role, it does not eliminate the need for first party fiduciary liability insurance.
While most small plan sponsors lack fiduciary liability insurance, sponsors who do have coverage should not indemnify any third-party fiduciary. Sponsors should also be aware that the advisors Errors & Omission insurance may be insufficient when it comes to coverage for "fiduciary acts for others for remuneration." Entering into an investment advisory service contract could also preclude an advisor’s existing fiduciary coverage.
As a result of confusion surrounding fiduciary roles and insurance coverage, sponsors should demand proof of affirmative fiduciary coverage for the advisor and their entity. ERISA bonds for discretionary authority and employee dishonesty coverage for non-ERISA plans should also be required. Additionally, the advisor’s investment advisory contract should be reviewed carefully, including any applicable indemnification language.
______________________________
GOALS & OBJECTIVES
Because companies and objectives vary, sponsors should establish specific goals before the evaluation process is started. While common goals include the lowering of costs, increased participation, improving returns and fiduciary insulation, smaller companies may be interested in increasing the benefits for the owners or key employees. Given that chemistry generally plays a role, the due diligence should be performed on a product, service, feature, individual or team rather than on a sales presentation or personalities.
To enhance efficiency, the sponsor should identify and communicate the exact scope of the engagement, including the company background, plan overview and the minimum requirements for participation to all pre-screened candidates in advance of this process.
Once the candidates have been selected and the process engages, a standardized approach should be used to ensure fairness. To avoid stacking the deck, sponsors should guard against attempts to skew the process by parties of influence.
The need for plan sponsors to have the tools and processes to perform due diligence cannot be over emphasized. While independent Registered Investment Advisors (SEC registered under the Investment Advisers Act of 1940) may operate with a non-ERISA fiduciary standard, they also operate with little regulatory oversight, no Continuing Education requirements and little, if any, net worth requirement. Furthermore, many states don’t require any licensing. Moreover, consultants who are not RIAs or registered representatives affiliated with a broker dealer (FINRA registered under the Securities Exchange Act of 1934) may not be subject to ANY regulations, licensing requirements or supervision.
Investment consultants, "retirement plan" consultants and financial planners are all very different. Trust must be earned, but far more than the organization, credentials, licenses, registration status or fiduciary roles, the individual or team’s retirement plans KNOWLEDGE, EXPERIENCE, DEPENDABILITY and DELIVERABLES are the differentiators.
©Copyright 2009. All rights reserved. Center for Due Diligence. This release is published exclusively for the trade as general information and should not be viewed as a recommendation to buy or sell securities, other investments or to adopt any investment strategy. This material should also not be viewed as a forecast as CFDD opinions are influenced by marketplace dynamics and subject to change. The CFDD is not a law, advisory or investment firm. We do not give legal, tax, investment or any other type of advice. The CFDD does not warrant and is not responsible for the accuracy of content, errors or omissions. All investments involve risk. Reliance upon information in this material is at the sole discretion of the reader. The CFDD is an information & strategic resources firm serving retirement plan advisors. The CFDD also hosts the industry’s largest conference for retirement plan advisors. The CFDD’s October 6-8, 2010 Advisor Conference will be held at the downtown Chicago Fairmont Hotel. For more information about our publications, conferences and advertising opportunities, contact: CFDD, PO Box 8, Western Springs, IL 60558. We can be reached by phone at (630) 662-0284, by fax at (630) 662-0286 and by email at CFDD@TheCFDD.. You may also visit our website for more information at: www.thecfdd.com
