Fiduciary lessons from COVID19 crisis


A crisis can bring out the best and worst in people. It also puts actions and communications under a microscope.

What I have learned during COVID-19 crisis is that political leaders who are transparent, use facts, seem to put others’ interests above their own and avoid blaming others — even if it does not always make them look good — are the ones I tend to trust.

Isn’t that what we expect from enlightened defined-contribution plan fiduciaries, whom I like to call stewards? We make decisions on behalf of mostly unsophisticated participants, in plans overseen by sponsors that rely heavily on their providers and advisers.

There are two types of Employee Retirement Income Security Act fiduciaries I have seen in the DC arena: those who are rules-based and those who are stewards.

Rules-based fiduciaries follow the law but do not put clients’ interest above their own. They can live with conflicts of interest, if those conflicts do not violate the law and do not seem egregious. They are less than transparent, providing facts only when required, and in a format that is hard to understand — or even worse, distorted or manipulated. Their primary goal is to make money and, by hiding fees, make themselves seem more attractive without getting fined or censored.

On the other hand, stewards put clients’ interest first, avoiding conflicts. They are completely transparent, supplying facts in simple language. Their goal is to improve retirement plans and help clients’ employees, even at their own expense. In some cases, that can mean walking away from an engagement or opportunity.

Human resources and finance professionals who are on the front lines, managing their organization’s retirement plan, are not stupid — but they juggle many responsibilities and, understandably, can be overwhelmed by ERISA’s complexities and anachronistic language. They may have virtually no training and even less support from senior management. But they are waking up, and they will continue to be more engaged, as workplace savings takes on greater importance for employees and employers alike.

After conducting hundreds of half-day plan sponsor training programs, I have met a scarce few who have read their 408(b)(2) disclosure, and none who claimed to understand them. That is hardly a surprise, because most providers are rules-based, following the law without being clear or transparent.

How do we think that makes plan sponsors feel? Trusting or skeptical? When I explain the complicated and arcane revenue-sharing schemes used to pay for DC plan administration, the most common reaction is, “Why do they do it that way?” The clear impression is that something is wrong and needs to be hidden.

Here are some examples of conflicted messages and actions by ERISA fiduciaries:

  1. All-in, fee-based pricing for record keepers and advisers raises concerns, compared with a base fixed fee plus activity charges. If everything is included, the question is, what does “everything” mean? And if they don’t use everything, should they get a refund?
  2. Not encouraging plan sponsors to conduct due diligence on advisers the same way that advisers encourage them to review their record keeper raises a simple question: “What are you afraid of?” I have met few advisers who like or encourage clients and prospects to conduct formal adviser requests for proposals. But those same advisers strongly advocate for the same process with record keepers and money managers, arguing that not doing so is a clear fiduciary breach.
  3. Advisers who advocate for products for which they are paid an extra fee, like some managed accounts programs, is another red flag. Some will argue the results are better for participants and that there is no regulatory violation. But aren’t these professionals already being paid to be fiduciary advisers? And by definition, aren’t fiduciaries required to avoid financial incentives to recommend one investment over another?
  4. Record keepers that receive money manager “marketing fees” that are hard to identify and are not calculated in the cost of the plan raise clear conflicts. Yes, the plan and participants might seem to get a better deal, but only from money managers willing to pay — not necessarily the ones that are best suited. Whose interest is being served?
  5. Transparency, facts and stewardship will be critical to the financial service industry, but especially to the DC industry, which serves less sophisticated investors and buyers. Not providing all the facts about costs in a clear and understandable manner might no longer be a great marketing tool.

Plan sponsors are willing to pay for high-level professional services. They do it every day with lawyers, certified public accountants and consultants. Though we have come a long way from the era when record keepers marketed their services as “free,” passing all costs, including the adviser fee, to participants, we still have a long way to go.

In the wake of the COVID-19 crisis, those advisers and providers that are transparent, providing facts in a clear format and avoiding conflicts will not only be in demand — they might be able to command higher fees. Similarly, some politicians provide real data, do not contradict themselves, do not blame others in hopes of looking better and put their constituents’ interests above their own. And those public servants are more likely to prevail in the upcoming election.

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Fred Barstein is founder and CEO of and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ 

Written by Investors Wallets

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